Asian currency markets opened the week with the yen sliding slightly after a sharp rebound last week, and the U.S. dollar remained largely unchanged as weaker U.S. consumer inflation readings shifted expectations for interest-rate reductions by the Federal Reserve. Liquidity conditions could be muted with markets in the United States, China, Taiwan and South Korea closed for holidays.
In early Asian trade on Monday the yen eased 0.2% to 153.07 per U.S. dollar, reversing some of the nearly 3% surge it posted over the previous week. That earlier weekly advance was the currency's largest in about 15 months and followed the decisive election result that delivered a landslide win for Prime Minister Sanae Takaichi.
Market participants credited the removal of political uncertainty with encouraging longer-term investors to return to Japanese assets. "While many thought a supermajority for her LDP party would be negative for Japanese bonds and the yen, the exact opposite happened: They both rallied," said Brent Donnelly, a currency trader and founder of analytics firm Spectra Markets. "The removal of uncertainty has encouraged long-term investors to dip their toes back in the water. With a bit of stability, those juicier Japanese yields are attracting plenty of interest. So are the Nikkei and the yen. It's called the 'Buy Japan' trade."
However, Japan's own economic data released on Monday underscored constraints the new administration faces. The economy posted only marginal growth in the October-December quarter, expanding at an annualised rate of 0.2%. That muted pace may complicate the timing and scope of any tightening by the Bank of Japan.
The BOJ is set to meet in March, and market pricing currently assigns roughly 20% odds to a rate hike at that meeting. Some analysts remain sceptical that the yen can fully transition from being primarily a funding currency to becoming an investment currency unless the BOJ adopts a more hawkish track than anticipated. OCBC has maintained a year-end 2026 forecast for the yen at 149 per U.S. dollar, reflecting its view that the central bank would need to be more aggressive than the two rate hikes it currently expects for the year to materially change that dynamic.
In the United States, January consumer price data published last week came in below expectations, a result that both pushes back against immediate inflation pressure and reduces near-term urgency for the Fed to begin cutting rates. Even so, the numbers did not prompt markets to fully price in a rapid cycle of easing.
"The markets are flirting with pricing in a third cut," said Kyle Rodda, senior financial analyst at Capital.com. Futures markets imply about 62 basis points of additional easing priced in for the rest of this year, and traders are currently attaching about a 68% probability to a rate reduction by June.
Currency crosses showed limited movement on Monday. The euro was little changed at $1.1863 while sterling slipped marginally to $1.3638. The dollar index - which tracks the U.S. currency against six major peers - held steady at 96.959 after falling 0.8% in the prior week.
Most of the pronounced reaction to the inflation data occurred in the bond market. The U.S. two-year Treasury yield, a gauge closely tied to expectations for short-term interest rates, closed on Friday at its lowest level since 2022, while the 10-year yield declined 4.8 basis points.
Elsewhere in currency markets, the Swiss franc softened slightly to 0.7685 per U.S. dollar after advancing more than 1% the previous week. That earlier strength has raised investor concern about potential intervention from the Swiss National Bank to temper franc gains.
OCBC strategists noted that additional appreciation of the franc could represent downside surprises relative to the SNB's inflation forecasts and might test the bank's tolerance for a stronger currency, even though returning to negative interest rates remains an unlikely immediate policy option.
Market context: The combination of reduced Japanese political risk, modest U.S. inflation readings and light holiday liquidity has generated a recalibration across FX and fixed income markets. Traders are revisiting the odds of central bank moves in both Tokyo and Washington, with implications for yields, currency flows and investor positioning in regional equities.