The dollar’s decline following the U.S. midterm elections impacted the yen, albeit in a convoluted manner. USD/JPY commenced trading on Wednesday at 158.47, slightly lower than Tuesday’s closing figure of 158.69, which represented a near three-week peak. As early vote counts confirmed a Democratic sweep of the House and Senate, the pair declined below 158.00 during the Asian session, reaching a session low of 157.39. The Dollar Index fell to a one-month low at 101.41, while the 10-year Treasury yield decreased to as low as 4.89%. The yen was unable to sustain its upward movement. By the European session, USD/JPY had recovered back above 158.00 and was trading at 158.12, reflecting a decline of 0.36% on the day, after relinquishing nearly half the gains the yen achieved following the election news. The daily range extended from 157.39 to 158.60, encompassing a total of 121 pips. Against the dollar, the euro appreciated by 0.6%, and the Swiss franc also increased by 0.6%. In contrast, the yen experienced a more modest rise, gaining between 0.36% and 0.4%. That underperformance is the narrative. The Democratic victory prompted a flight to safety among investors, who adjusted for the risks associated with AI regulation and anticipated slower growth, resulting in gains for both the yen and the franc. However, the franc surpassed the yen by a significant margin, and EUR/USD reached 1.1272, marking its peak since October 6. The yen’s limited gain illustrates the ongoing interest rate differential that continues to favour the dollar.
The broader context indicates a pair confined within a range. Over the past week, the USD/JPY currency pair fluctuated between 156.975 on October 30 and 158.74 on November 3. In the preceding 30 days, it ranged from 156.07 to 158.95, with an average value of 157.97. The 52-week range spans from 152.64 on February 12 to 163.86 on July 29, marking the near 40-year low for the yen that prompted coordinated intervention by the U.S. and Japan. The year illustrates the persistent weakness of the yen. USD/JPY was at 154.22 one year prior and has experienced an increase of 2.9% since that time. The average for 2026 is projected at 158.43, in contrast to 149.67 for 2025. Tokyo allocated over ¥27 trillion to defend the currency this year, setting a new record by a significant margin. The forecast is predicated on a singular thesis. The Democratic sweep resulted in a decline in U.S. yields, while the Bank of Japan indicated a potential rate hike in December following the achievement of its 2% inflation target. Additionally, the threat of intervention from Tokyo keeps the pair constrained below 160. Those three forces suggest a decline in USD/JPY. The 78% probability of a Federal Reserve rate increase in December, coupled with the 215 basis-point differential in the 10-year yield, suggests that a collapse is unlikely. The bias is bearish below 158.60, with a first target at 156.82 and a floor at 156.07. The dollar experienced a significant decline on Wednesday, positioning itself for its largest daily percentage drop in three weeks, following the Democrats’ acquisition of control over both chambers of Congress. The Dollar Index declined to a one-month low of 101.41 before recovering to 101.51, reflecting a decrease of 0.32%. The 10-year Treasury yield experienced a decline of nearly 3 basis points, settling at 4.921% after reaching a low of 4.89% overnight.
The mechanism operates via fiscal policy and growth. A Democratic Congress will resist Trump’s proposals to reduce taxes and augment government expenditure, resulting in diminished Treasury issuance and reduced fiscal stimulus. Markets anticipate that the Democratic Party will impose regulations on the artificial intelligence sector and decelerate the development of data centers. That outlook prompted investors to seek refuge in Treasuries, resulting in a decline in yields and the dollar, while simultaneously enhancing the value of the yen and franc. The growth angle is significant for the Federal Reserve. A slowdown in growth may diminish the attractiveness of the dollar and lessen the necessity for interest rate increases. Markets continue to assign a 78% probability to a 25 basis-point increase at the December 8 to 9 meeting, following the Fed’s adjustment of rates to a 3.75% to 4.00% range in September. If the election diminishes the Federal Reserve’s necessity to tighten monetary policy, the support for the dollar’s exchange rate may weaken. Some strategists perceive the response as constrained. Investors increasingly seem to regard the election outcome as a limitation on future policy rather than a fundamental threat to the overarching narrative of U.S. growth. Even with a Democratic sweep, passing federal legislation remains challenging due to Trump’s veto power. Most analysts anticipated a moderate and temporary response in the dollar, rather than a sustained trend. The argument for a more pronounced depreciation of the dollar is grounded in the dynamics of the energy sector and the movement of capital. Japan and the euro area, being net importers of energy commodities, gain from reduced oil prices. Brent declined by 2.8% to $100.71 on Wednesday, continuing an eight-session downturn totalling 13%. A shift of capital to Europe and Asia, coinciding with the decline of American exceptionalism, would bolster the yen.
The competing forces maintain the dollar within a defined range. Political uncertainty and lower Treasury yields exert pressure on one side; conversely, restrictive monetary policy and potential enhancements in fiscal credibility bolster the other. The post-election selloff appears to resemble a notable correction rather than the initiation of a validated bearish reversal. In the case of USD/JPY, the dollar component dictates the trajectory. The pair’s 0.36% decline is less pronounced than the dollar’s overall decrease, as yen-specific factors constrained the increase. If U.S. yields fall beneath 4.89%, the USD/JPY may once more approach 157.39. If they rebound above 5.00%, the pair returns to 158.60. The Bank of Japan’s October decision has significantly altered the outlook for the yen. On October 30, the policy board decided to maintain the overnight call rate at 1.25%, resulting in an 8 to 1 vote, with board member Hajime Takata expressing dissent in favour of increasing the rate to 1.50%. The central bank raised rates to 1.25% in September, marking the highest level since 1995, and opted against a consecutive increase to assess the impact of previous hikes on lending conditions. The language exhibited a hawkish tone. The BoJ declared that underlying CPI inflation is at a level generally consistent with its 2% target, a shift from July’s language that inflation was “approaching” 2%. That change signifies the central bank’s proclamation of success in a nearly 14-year struggle to achieve its inflation target. The board has adjusted its fiscal 2027 core inflation median to 2.6% and indicated that it “will continue to raise the policy interest rate”.
Governor Kazuo Ueda reaffirmed the indication. At his press conference, he stated that policymakers will evaluate the necessity for a rate hike at every meeting, including the forthcoming one, and emphasised the significance of attaining inflation in a stable and sustainable manner. He cautioned that the bank needs to remain alert to the possibility of inflation exceeding the target, indicating potential for additional hikes. The BoJ also accelerated the pace of its exchange-traded fund sales to roughly ¥860 billion a year, another step in unwinding years of extraordinary stimulus. The yen’s response was subdued. Japan’s currency appreciated by as much as 0.4% to 157.15 per dollar on October 30, subsequently retracing much of that gain after Ueda provided limited new insights regarding timing. The yen continued to exhibit a monthly decline for October. The policy rate currently resides within the range of 1.1% to 2.5%, which is estimated by BoJ staff to represent Japan’s neutral rate—an equilibrium point that neither dampens nor stimulates economic activity excessively. With bank lending growth remaining robust, the central bank perceives financial conditions as accommodative, indicating potential for additional rate hikes prior to the policy rate attaining neutrality. The decision in December is the primary focus. Analysts surveyed by Reuters anticipate that the Bank of Japan will elevate interest rates to 1.5% in December and maintain a quarterly cadence of rate hikes. The upcoming policy decision is set for December 18, as there is no Bank of Japan meeting planned for November. The board is set to release its Summary of Opinions from the October meeting on November 9, which will indicate the number of members, in addition to Takata, who support a rate increase in December.
