The US dollar index dropped to its lowest level since January 2015 on Thursday, falling slightly below the long-term trough established just last week, before paring some of those losses. Extended pressure on the dollar on Thursday was exacerbated by early surges in both the euro and yen, prompting USD/JPY to fall to a critical support level.
The euro jumped on Thursday after European Central Bank President Mario Draghi asserted that the ECB would be making key decisions on the tapering of its asset purchase program at its next meeting in October. This clear mention of QE tapering gave euro bulls some further confidence that economic conditions in the Eurozone should soon be conducive for ECB policy tightening.
As the US dollar fell against the euro, it also dropped against other major currencies, including the Japanese yen, which stayed well-supported as government bond yields declined. One driver of continued dollar weakness on Thursday was skepticism over a deal between President Trump and Democratic leaders in Congress to extend the expiring US debt ceiling by a mere three months.
Combined, heavy pressure on the dollar along with a yen that has remained solidly supported helped push USD/JPY down to a low right around the key 108.00 support level before rebounding. This important level has served as both major support and resistance for the currency pair in the past, with the most recent instance occurring in mid-April, when USD/JPY bounced cleanly off 108.00 and subsequently rose sharply for the next several weeks.
As an increasingly dovish US outlook for interest rates, monetary policy, and fiscal policy continues to plague the US dollar, USD/JPY could be set for an impending breakdown below support, especially if global risk factors further boost safe-haven demand for the Japanese yen. Such a breakdown below 108.00 support, if sustained, would be a major technical event, with the next primary price target to the downside around the key 105.50 support level.