The USD has lost upward momentum due to uncertainty around U.S. policy. Recent threats have negatively impacted confidence, increasing FX hedging of U.S. assets. There has been a decline in USD/JPY, with discussions on potential U.S.-Japan interventions.
The USD faced selling pressure, with a lower close for the dollar index ending a streak of three weekly gains. There’s a possibility that U.S.-Japan joint intervention could indicate the Trump administration’s preference for a weaker USD.
Yens Rebound
The sell-off is reinforced by the yen’s rebound, with USD/JPY dropping from 159.23 to 153.40. Continued yen strengthening may lead to concerns over disruptive unwinding of JPY-funded trades, similar to events in mid-2024.
Trump’s policy shift in dropping higher tariffs on NATO members has reduced global growth risks. This move decreases chances of a trade conflict between the U.S. and the EU, offering some economic relief.
The U.S. dollar has lost its upward momentum from the start of the year, finishing last week with its first weekly loss of 2026. The Dollar Index (DXY) has fallen to around 101.50 as uncertainty over U.S. policy weighs on investor confidence. This shift suggests that hedging U.S. asset exposure is becoming a priority.
The dollar’s sell-off was accelerated by a dramatic rebound in the Japanese yen, which saw the USD/JPY pair fall from over 159 to below 154. This move echoes the interventions we saw in late 2024, raising the prospect of joint U.S.-Japan action to weaken the dollar. For derivative traders, this signals that buying put options on USD/JPY or using options to bet on higher currency volatility are now viable strategies.
Market Risk and Defensive Strategies
We must now watch for a disruptive unwinding of JPY-funded carry trades, a situation that caused significant market stress back in the summer of 2024. A rapidly strengthening yen forces investors to sell global assets to buy back the yen they borrowed, increasing overall market risk. The VIX, a key gauge of stock market fear, has already climbed from its lows earlier this month, reflecting these growing concerns.
Considering this risk, purchasing protective put options on major U.S. stock indices like the S&P 500 becomes a prudent move. Such positions would profit from the kind of broad market sell-off that a carry trade unwind could trigger. This is a defensive strategy to guard against a sudden spike in volatility.
At the same time, the administration’s recent reversal on tariff threats against key European allies has removed a major headwind for global growth. This has improved the outlook for European equities relative to their U.S. counterparts. We could therefore consider call options on European indices like Germany’s DAX to capitalize on this specific positive development.
