FX alert: Dollar momentum fades, Yen politics enter the spotlight

The dollar’s burst of energy after last week’s FOMC has already started to fade, and truth be told, it never looked like a rally with deep roots. This was a market that had been leaning too far toward dovish Fed bets, and Powell’s cautious tone forced traders to square up their short USD positions. It was a jolt of caffeine rather than a structural second wind. Now that the cup is empty, the greenback is left wobbling on its legs, trying to justify yesterday’s Asia levels that positioning—not fundamentals—helped curate.

In fixed income, the silence speaks volumes: yields barely budged yesterday, suggesting the bond market sees no new storm front brewing. With two more rate cuts already pencilled in, risk appetite is enjoying a broadening runway.

Volatility has drained away like water from a receding tide, leaving investors eager to explore sandbars of carry and risk that seemed treacherous just weeks ago.

A TikTok deal here, a cordial Trump–Xi call there, and suddenly the backdrop is more of a tailwind than a headwind for currency markets. In that environment, it’s hard to imagine the dollar sustaining much of a rebound.

The yen, however, has not shared in the spoils and remains a G10 laggard in September, weakened not by macro flows but by the messier terrain of politics. The LDP leadership race has thrown currency traders into the business of parsing campaign rhetoric—an uncomfortable task for markets that prefer hard data to soft promises.

Sanae Takaichi, once the flag-bearer for “strategic fiscal stimulus,” has been subtly reshaping her message. Where she previously championed aggressive spending and consumption tax cuts, her recent remarks are more measured: excess revenues first, caution on JGB issuance, and an openness to let fiscal spigots run only if “unavoidable.” The firebrand tone of last year has given way to a more pragmatic pitch. Even her sharp jabs at BoJ policy—a year ago she derided rate hikes as “stupid”—have been absent this time around.

This recalibration matters. Abenomics was engineered in an era when the battle was against ghostly deflation; today, voters are angry at inflation that feels all too real. By softening her stance, Takaichi edges closer to the more conservative line of Koizumi. That narrows the perceived gulf between candidates, which in turn erodes the political risk premium weighing on the yen. If Koizumi is yen-positive and Takaichi yen-negative, but their fiscal colours start blending, then traders have less reason to punish the currency for fear of reckless policy. Hence, we can expect a slow bleed lower in USDJPY over the subsequent few trading sessions.

However, tomorrow’s debate could drag BoJ policy views out of hiding, and that will matter—markets still want to know if either contender would pressure Ueda. But the broader narrative is shifting: the yen’s weakness may have been overdone if politics no longer guarantee yen-negative headlines.

For now, the dollar is drifting lower on a soft current, while global risk assets ride the dovish FOMC breeze, and the yen waits on political outcomes rather than spreadsheets. Markets are navigating a river where positioning, politics, and perception steer the flow more than the raw power of rates. And in such a river, eddies form quickly, leaving the dollar vulnerable to being spun back into its prior ranges. So here we are back in familiar ranges.