The USD/JPY pair is experiencing a decline for the third consecutive day, as the Japanese Yen gains strength against the US Dollar. The current exchange rate is approximately 150.35, a decrease of 0.45% within the day, attributed to the broad softness of the Greenback driven by US-China trade tensions.

Lingering trade conflicts between the US and China are affecting market sentiment, further exacerbated by a prolonged US government shutdown. Additionally, anticipations of further monetary easing by the Federal Reserve contribute to the pressure on the USD, with markets forecasting 25-basis-point rate cuts in October and December.

The US Dollar Index Decrease

The US Dollar Index, which assesses the Greenback’s value against six other major currencies, has decreased to its lowest since 7 October, trading around 98.41. In Japan, political uncertainty follows the collapse of the LDP-Komeito coalition, affecting the political landscape and impacting the Yen’s advance.

The International Monetary Fund (IMF) has recommended the Bank of Japan (BoJ) undertake a gradual policy normalization approach. It advises maintaining flexibility due to fragile global conditions and urges Japan to enhance fiscal discipline to address growing debt concerns.

Given the broad-based weakness in the US Dollar, we see the immediate path for USD/JPY as remaining biased to the downside. The combination of a US government shutdown, now entering its third week, and ongoing trade tensions is fueling a classic risk-off sentiment. This environment makes the Japanese Yen, a traditional safe-haven currency, more attractive.

The market’s expectation for Federal Reserve policy is a key driver for dollar softness, with Fed funds futures now pricing in an 85% probability of a 25-basis-point rate cut at the October 29 meeting. This follows the recent September 2025 Core PCE inflation reading, which came in at 2.1%, below the Fed’s more hawkish forecasts from the summer. The US Dollar Index (DXY) reflects this sentiment, having broken decisively below the 99.00 support level last week.

Derivative Trading Strategy

For derivative traders, this suggests buying USD/JPY put options to profit from a further slide remains the primary strategy. We are looking at strikes around the 148.50 level for November expiration, anticipating a test of the support seen during the August 2025 flash rally. Volatility is elevated, with the VIX index hovering around 22, making options pricier but also potentially more profitable if the downward trend accelerates.

Looking back, we remember the sharp interventions by the Japanese Ministry of Finance to weaken the Yen back in late 2022 when the pair pushed past 151. However, with the current dynamic being Yen strength driven by global fears, we believe authorities are less likely to intervene against their currency’s safe-haven appeal. This leaves more room for the Yen to appreciate in the short term.

Still, the political uncertainty in Japan presents a notable risk that could trigger a sharp reversal in USD/JPY. A swift and stable government coalition formed by Sanae Takaichi could boost domestic confidence and weigh on the Yen’s haven status. To hedge against a sudden snap-back rally, traders could consider purchasing cheap, out-of-the-money call options or structuring bearish put spreads to define risk and cap potential losses.

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