The Japanese Yen remains stable against the US Dollar, trading near multi-month lows due to closed Japanese markets for a public holiday. USD/JPY is nearly unchanged around 154.18, close to its highest in eight-and-a-half months, as traders absorb recent US manufacturing data indicating contraction.

The US Dollar’s rise stalled after the ISM reported a continued contraction in US factory activity in October. The Manufacturing PMI decreased to 48.7, below expectations of 49.5, reflecting struggles in output and new orders. A separate S&P Global report showed a rise in the final US Manufacturing PMI to 52.5 in October from 52 in September.

Dollar Index Eases

The US Dollar Index (DXY) has eased to around 99.83, down from an earlier high of 99.99. The Greenback is still supported by the Federal Reserve’s stance after last week’s rate cut, with reduced chances of a December cut, now around 65% from the previous 94%.

In Japan, the BoJ kept rates unchanged at 0.50%, with the governor highlighting the need for clearer evidence of sustained wage growth before further policy changes. Upcoming US private-sector employment data and Japanese Jibun Bank Manufacturing PMI and BoJ Minutes are key focuses for markets.

We see the USD/JPY pair holding near the critical 158.50 level as the US Dollar shows signs of fatigue. This comes after the latest data hinted at a cooling US economy, shifting focus squarely onto the Federal Reserve’s future path. Derivative traders should note this heightened sensitivity to incoming economic figures in the weeks ahead.

The dollar’s recent pullback was triggered by the October ISM Manufacturing PMI, which registered at 49.2, marking the third consecutive month of contraction. This figure, while slightly better than feared, reinforces the view that sustained high interest rates are finally weighing on US factory activity. This weakness supports options strategies that bet on a lower dollar, such as buying puts on USD/JPY.

Federal Reserve Policy and Interest Rate Impact

Despite the dollar’s softness, we remember that the Federal Reserve has held its benchmark rate at 5.00% for over a year, creating a substantial yield advantage. The market is now pricing in a roughly 40% probability of a first rate cut by March 2026, according to the CME FedWatch tool. This leaves the door open for dollar strength if upcoming data, like this week’s JOLTS and ADP reports, prove unexpectedly resilient.

Meanwhile, the Bank of Japan’s policy rate remains at a mere 0.25%, with Governor Ueda recently reiterating the need for more evidence of sustainable inflation and wage growth. This vast interest rate differential continues to be the primary force keeping the yen weak against the dollar. Traders should anticipate that only a significant shift in this policy divergence will cause a fundamental trend reversal.

We must not forget the lessons from 2022 and 2024, when Japanese authorities intervened directly in the market to support the yen as it weakened past the 152 and then 160 levels. With the pair again approaching these sensitive zones, the risk of official action is a crucial factor that could trigger sharp, sudden moves. This suggests that holding short-volatility positions could be particularly risky in the coming weeks.

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