USD/JPY Over 155.00 Drives Dollar Recovery but Will Bears Show Up to Defend?

Just a week ago it looked as though the world may be on the verge of a de-leveraging event. While President Trump had cheered for USD weakness pretty much since his inauguration a year earlier, it was a comment from US Treasury Secretary Scott Bessent on Wednesday, ahead of the FOMC meeting, that really seemed to get markets’ attention. And then on Friday, another comment from a Trump loyalist, Kevin Hassett, made it seem as though the administration was walking back a remark from Trump earlier in the week. When he was asked about USD-weakness, he responded with ‘it’s great,’ which only contributed further to the Dollar’s decline until it finally found a low.

While USD weakness could benefit exports from the country, which could help Trump and the GOP into mid-term elections later in the year, there’s also risk. A weaker currency often leads to stronger inflation, something that puts the Fed in a more difficult spot especially if they’re going to cut rates later in the year.

The benefits of currency weakness are somewhat obvious and this is, after all, why both Japan and China have went out of their way to keep the Yen and the Yuan cheap. Which raises another risk that came to light this week, when Xi Jinping said that he wanted the Yuan to become the global reserve currency.

There’s a lot to unpack around that scenario but given the tight currency controls employed by China it makes little sense. Combine that with the fact that the Yuan as a true global reserve would entail China losing considerable control over their economy, with a mechanism that they often use to pull strings, and it, again, makes little sense that they would want to take that risk. Instead, it seems the design of the comment was to further stoke USD-weakness and the ramifications that could come from that, making the US as more vulnerable especially if we get rate cuts later in the year and inflation remains relatively high to the point where the Fed backs themselves into a corner (again).

On the part of the Yen, Trump hasn’t been shy about calling out Japan for their currency weakness strategy. Last April, when announcing the ‘Liberation Day’ tariffs, the chart that Trump displayed included currency weakness as an item that Japan had used to gain an unfair advantage in trade. This is likely why the USD/JPY pair took a swan dive in April until eventually finding support at the 140.00 handle, the same level that came into play in the September prior just before the Fed cut rates.

At that point, both the Japanese side and the US side seemed to back away from the tension. Trump pushed back tariff implementation and the Bank of Japan said they had little motivation to hike rates at the time. And as we’d seen from numerous prior examples the carry trade came right back as rate differentials remained (and remain) tilted to the long side of the pair.

USD/JPY Weekly Chart

Chart prepared by James Stanley; data derived from Tradingview

Fundamentals v/s Positioning

At this point there remains rate disparity between the US and Japan and while the BoJ has hiked rates and may hike rates again in the future, the recent Japanese government ran on a pro-growth platform and it seems unlikely that the BoJ will take a harsh hawkish turn unless absolutely necessary.

Instead, it seems like what happened here was another major psychological level coming into play at 160.00, which has twice been defended by intervention in April and July of 2024. As that price came closer and closer to being in-play, the Japanese finance minister ramped up warnings of intervention.

If you’re a bull and price is at 159 but you expect the possibility of an intervention at 160.00, are you really going to take that risk? The perceived upside of 100 pips is relatively small compared to the possible downside if you get caught by an intervention order. This is likely why USD/JPY has held below 160.00 in both bullish runs since the 2024 episodes.

USD/JPY Weekly Chart

Chart prepared by James Stanley; data derived from Tradingview

Possible Ramifications of Carry Unwind

This is something that popped up in the summer of 2024 but to explain we need to go over a bit of background.

While retail traders probably consider the carry trade as buying a high-yielder and selling a low-yielder in order to earn swap or rollover on the pair, which can further drive demand and trends and enable the trader to both earn rollover payments and watch prices appreciate, there’s an actual mechanic here, as well. If you’re an institution and rates in Japan are still near zero even as the US and Europe have lifted rates, there’s opportunity for a spread trade. You can go to a Japanese bank and get a loan for a low rate, and then go back to the economy that’s seeing higher rates and invest it there to pocket the spread. The problem, in that case, is that you’re essentially vulnerable to the Yen as the loan from the Japanese bank was in Yen and if USD/JPY keeps going up (and the Yen continues to weaken elsewhere, as well), then any profit accrued from the spread can simply be wiped out by currency weakness.

So, an easy way to hedge that risk is to sell Yen and buy another currency. This will also put pressure on the topside of USD/JPY and this is why the pair hockey-sticked in 2022 when the Fed started hiking rates. This is, after all, the design of the monetary policy backdrop in each economy.

The problem, at that point, is the risk of undesirable inflation for Japan as a fast-sliding currency can soon lead to a quagmire for the Central Bank, where they have to hike rates even if growth is lagging. That can then force the economy into a possible recession and for a Japan that was mired with decades of disinflation and even deflation, that’s a risk that seems too big to bear.

So in 2022 as USD/JPY got up to 150.00 the Bank of Japan was ordered to intervene. That stalled the advance long enough for slower US inflation to cause a reset in the move, and this is where the plot thickens.

Fundamentals are a big push point for price but the relationship is not direct. The only thing that actually moves price in a true market environment is buying and selling, supply and demand. And while fundamentals can often have a push on the fulcrum of supply and demand, it’s not always direct. And when we do see a trend such as what showed in 2021-2022 and again in 2023 and again in 2024 and then again from April of last year into early-2026, the exuberant demand that drove the move creates a heavy one-sided position in the pair.

And even the slightest hint or whiff of change can compel a snowball-avalanche scenario, and that’s what started to show up last week, until the Bessent comments on Wednesday, that is.

USD/JPY Four Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

USD/JPY Shorter-Term

The above chart shows a rally that’s been fairly one-sided since the low last week, and this illustrates the value proposition that bulls are seeing given the still-elevated carry on the long side of the pair, combined with the walking back of the USD-weakness comments.

With that said, it’s difficult to imagine this remaining the case through the 160.00 handle which has shown multiple episodes of stall. If we do end up with strong US data later this week, we’ll likely see more threats of intervention from the MoF.

At this point, we’re about to see what sellers are made of, and this isn’t just short-sellers looking to take on exposure but longs that have seen the bounce and now have the opportunity to get out closer to the highs.

For near-term strategy, there’s now a bullish trend to work with and the familiar zone of support to resistance at 154.45-155.00 is now a key zone for buyers to hold on pullback setups, with follow-through resistance at 156.27 and then 157.90.

USD/JPY Four-Hour Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro