Fed-Cut Odds Weigh on Dollar; Yen Plunges

Fed rate-cut expectations push dollar lower

After a softer US jobs report, markets quickly stepped up pricing for Fed easing, with traders putting significant probability on a 25 basis point cut in September. The change in US rate expectations reduced the dollar’s appeal, producing broad weakness across major crosses. EUR/USD traded near 1.17 and GBP/USD around 1.35 as dollar funding costs were repriced lower.

Immediate FX and yield effects

The most visible channel is interest rate differentials. As the market increased odds of Fed cuts, US short-term yields moved down relative to peers, compressing carry advantages that had supported the dollar. Risk-sensitive currencies and commodity-linked pairs benefited, while safe-haven demand for the dollar ebbed. Hedging and positioning flows amplified intraday moves as traders adjusted rate bets.

Yen tumbles after Japan prime minister resigns

Separately, political uncertainty in Tokyo sent the yen sharply weaker. Japan’s prime minister announced his resignation, creating questions about fiscal policy and potential shifts in Bank of Japan communication. USD/JPY jumped toward the 148 area, and the yen hit multi-year lows versus the euro and pound as investors reassessed policy continuity.

Why JPY remains headline-sensitive

The yen often reacts more to domestic political signals than other G10 currencies because small changes in fiscal stance or government-BOJ alignment can affect long-term yields and yield curve control expectations. With long-term Japanese government bond yields already elevated, any clarity on the next administration’s approach to spending and BOJ guidance will be a near-term driver for USD/JPY, EUR/JPY and GBP/JPY.

Practical levels and what to watch next

• Key levels: EUR/USD near 1.17, GBP/USD near 1.35, USD/JPY around 148. Short-term traders will watch 147 support and 150 resistance on USD/JPY.
• US CPI: A hotter-than-expected print would reduce Fed-cut odds and could re-strengthen the dollar; a softer print would reinforce the current dollar weakness.
• Japan leadership updates: Statements on fiscal plans or BOJ coordination from potential successors will be important for yen direction.
• JGB yields: Further rises would complicate the yen’s fall if they signal domestic inflation or policy shifts, potentially triggering larger FX moves.

Bottom line: The dominant cross-asset driver in the near term is US rate expectations; domestic political developments in Japan introduce outsized headline risk for the yen that can produce sharper, localized moves even as the dollar trades softer more broadly.