The US Dollar is experiencing a downturn, nearing the 152.00 level due to growing trade uncertainties. The hesitation above 152.00 is linked to trade tensions with China and political instability in Japan.

Higher fees on cargo vessels have exacerbated the Sino-US trade rift, affecting the US Dollar’s strength. The US-China trade relationship faces complications, with potential talks between US President Trump and China’s Xi Jinping slated for late October.

Political Instability in Japan

In Japan, the ruling coalition’s collapse impacts the new LDP leader, Takaichi, diminishing support for her economic policies. The political situation in Japan provides support to the Japanese Yen, as markets remain wary.

The ongoing US-China trade war began in 2018 under President Trump, involving trade barriers and resulting in the 2020 US-China Phase One trade deal. However, the conflict persisted under President Joe Biden, who maintained and extended tariffs.

Donald Trump’s return as US President in 2025 has reignited the trade conflict, with his pledge to impose 60% tariffs leading to renewed tensions. The trade war continues to affect global supply chains, contributing to reduced spending and impacting inflation.

The developing trade rift between the US and China is introducing significant uncertainty, pushing the US Dollar lower and capping USD/JPY below the 152.35 resistance level. We are seeing a notable increase in implied volatility, with the Japanese Yen Volatility Index (JYVIX) climbing over 15% in the last week to its highest point since the regional banking stress we saw earlier this year. This suggests that options traders are pricing in larger-than-usual price swings in the yen for the weeks ahead.

Economic Impact on the US Dollar and Japanese Yen

On the US side, the renewed protectionist stance is beginning to feed into economic data, which should keep the dollar on the defensive. Last week’s US import price index showed a surprise jump of 0.5%, reflecting the immediate impact of the new cargo fees and tariffs implemented since President Trump’s return to office in January 2025. This complicates the Federal Reserve’s position, as rising inflation from tariffs may occur alongside slowing economic growth.

For Japan, the political paralysis following the collapse of the ruling coalition is paradoxically strengthening the yen. The market is interpreting the lack of support for leader Takaichi’s pro-stimulus agenda as a sign that the era of massive fiscal spending and monetary easing may be nearing an end. Looking at positioning data from last Friday’s CFTC report, we can see that large speculators have cut their net short yen positions for the fourth consecutive week, indicating a broader shift in sentiment.

This environment is reminiscent of what we witnessed in mid-2019, when a similar escalation in the first trade war saw USD/JPY fall from around 111 to below 106 in a matter of months. A strategy of buying USD/JPY put options with a strike price below 151.00 could offer a way to profit from further downside, with the upcoming Trump-Xi meeting at the end of October serving as a major potential catalyst for such a move.

We must also consider the risk of intervention from Japanese authorities if the yen’s appreciation becomes too rapid. While they were comfortable with a weaker yen when inflation was the main global concern, a rapid move towards 148.00 could trigger verbal warnings from the Ministry of Finance. This makes selling out-of-the-money JPY call options a risky proposition until we get more clarity on their pain threshold.

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