Political developments dominated currency markets as the Japanese yen posted its sharpest decline against the dollar in five months, following Sanae Takaichi’s strong emergence as the leading candidate for Japan’s next prime minister. Takaichi, who previously served as Minister of Economic Security and Internal Affairs, advocates an expansionary fiscal agenda for the world’s fourth-largest economy and secured leadership of the ruling Liberal Democratic Party over the weekend.
Her victory prompted traders to scale back bets on a Bank of Japan rate hike this month and reevaluate the yen’s future trajectory. The dollar rose 1.8% to 150.1 yen its highest level since August and if the trend continues, it would mark the greenback’s largest one day gain since May.
During Asian trading, the euro reached a record high of 176.22 yen before paring gains to trade 1.2% higher at 175.3 yen. Investors had previously been advised to bet on yen appreciation, but many quickly exited those positions after the ruling party election results, as Takaichi’s unexpected win reintroduced uncertainty over Japan’s policy priorities and the timing of the Bank of Japan’s rate hike cycle.
Japanese long-term government bonds also faced notable selling pressure, with the yield on 40-year bonds jumping 15.2 basis points to 3.538%. Swap market pricing showed the probability of a rate hike by December falling to 41%, down from 68% at the end of last week.
At the same time, the euro weakened after the resignation of France’s new prime minister, deepening political uncertainty in a country already burdened by heavy debt. The euro fell 0.7% to $1.16635 and slipped 0.3% against the British pound to its lowest level in about a month. Meanwhile, the pound edged down 0.2% against the dollar to $1.3445.
In the background of these moves, traders are preparing this week for the absence of key U.S. economic data due to the ongoing government shutdown, which could complicate efforts to adjust current market expectations that a Federal Reserve rate cut in October is almost certain. Futures markets now assign a 96.7% probability of a 25-basis-point rate cut, according to the FedWatch tool. The lack of U.S. data is also expected to amplify market sensitivity to comments from monetary policymakers.
Stay informed about global markets through our previous analyses. and Now, you can also benefit from LDN company services via the LDN Global Markets trading platform.v
