Japanese Yen Rises on Strong GDP; U.S. Dollar Struggles

The Japanese yen gained strength on Monday following better-than-expected economic growth data, while the U.S. dollar remained near a two-month low as investors tempered their expectations regarding the impact of U.S. tariffs. Japan’s economy grew at a faster pace than anticipated in the fourth quarter, driven by increased business spending and a surprise rise in consumption. This positive economic performance has reinforced the likelihood of further interest rate hikes by the Bank of Japan (BOJ) in 2025, with markets now pricing in an additional 37 basis points worth of increases by December.

The yen rose 0.35% against the dollar, with the exchange rate reaching 151.76, briefly touching 151.48 earlier in the session. The boost in Japan’s economic outlook has strengthened speculation that the BOJ could accelerate its tightening cycle, marking a shift away from its historically loose monetary policy. Krishna Bhimavarapu, an economist at State Street Global Advisors, highlighted that household consumption is growing at a much faster pace than real consumption, indicating that inflation pressures remain strong, which could push the BOJ toward another rate hike sooner rather than later.

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Meanwhile, the U.S. dollar faced continued weakness, struggling to regain ground after last week’s losses. The greenback had declined sharply on Friday following weaker-than-expected U.S. retail sales data, which added to concerns that the American economy might be slowing. Investors also welcomed a delay in President Donald Trump’s reciprocal tariff measures, which initially sparked fears of increased trade tensions. While U.S. stock and bond markets remained closed due to Presidents’ Day, the dollar continued to trade in international markets, showing little recovery momentum. The dollar index stood at 106.85, up 0.1%, after tumbling 1.2% last week.

In Europe, geopolitical developments remained in focus, with reports indicating that Saudi Arabia will host negotiations aimed at resolving the ongoing Russia-Ukraine conflict. This news briefly supported the euro, which reached its highest level in two weeks on Friday at $1.051, before edging down to $1.0474. The British pound remained steady at $1.2591, after touching a two-month high of $1.263 last week.

Rodrigo Catril, a senior FX strategist at National Australia Bank, noted that market sentiment was driven by optimism that Trump’s tariffs may not be as disruptive as initially feared. However, he warned that uncertainty remains, with geopolitical tensions still unresolved and concerns about U.S. economic weakness weighing on the dollar. Some investors believe that the era of U.S. economic exceptionalism may be fading, which could further pressure the greenback in the coming months.

Commodity-linked currencies also benefited from dollar weakness. The Australian dollar surged to a two-month high, trading at $0.6362, ahead of the Reserve Bank of Australia’s (RBA) policy meeting on Tuesday. The RBA is widely expected to announce a quarter-point rate cut, marking its first interest rate reduction in over four years, aligning itself with other major central banks that have begun easing monetary policy. Similarly, the New Zealand dollar (kiwi) climbed to a two-month high before retreating slightly to $0.5731. The Reserve Bank of New Zealand (RBNZ) is also expected to cut interest rates by 50 basis points at its policy decision on Wednesday.

To Summarize

While the yen benefited from strong domestic economic data, the dollar’s trajectory remains uncertain as investors weigh weak retail sales figures against expectations for future monetary policy shifts. With central bank decisions in Australia and New Zealand on the horizon and continued trade policy uncertainty in the U.S., currency markets are likely to remain volatile in the short term. For now, the yen’s gains and the dollar’s struggles highlight a shifting global economic landscape where investor sentiment is increasingly driven by regional economic data and policy expectations rather than broad-based dollar strength.