USD/JPY steadies as tariff threats ease ahead of looming BoJ’s meeting

The US dollar has fallen sharply against major currencies following reports that the incoming Trump Administration might implement fewer significant tariffs than previously expected. Instead, it might seek more limited and targeted tariffs. During the election campaign, across-the-board tariffs of 10% to 20% were proposed on all imports.

However, some officials in the incoming administration are concerned that this might ignite inflation and hurt consumer purchasing power. Instead, they are considering universal tariffs on a limited selection of goods with the aim of boosting the competitiveness of key industries that are deemed essential, including output of products that play a role in defense supply chains. Tariffs are being considered on steel, iron, aluminum, copper, medical supplies, and clean energy products.

Japan is closely watching currency market positions, including those built on speculative bets, because volatility in exchange rates is undesirable. Uncertainty over new U.S. President Donald Trump’s economic policies could sway markets in unpredictable ways, highlighting the difficulty of projecting whether the dollar’s broad uptrend would continue. Authorities are focusing more on volatility, rather than yen levels, in guiding foreign-exchange rate policy.

The Bank of Japan (BoJ) is expected to raise interest rates on Friday barring any market shocks from Trump, a move that would lift short-term borrowing costs to levels unseen since the 2008 global financial crisis. The USD/JPY was virtually unchanged during the North American session on Tuesday, as traders assessed US President Donald Trump’s threats to impose 25% tariffs on Canada and Mexico as soon as February 1. The Greenback recovered as the major hit a daily high of 156.20, but fears faded as the pair traded near 155.54, virtually unchanged. At the time of writing, the cable is trading at 155.53.

Traders will continue to be attentive to Trump’s rhetoric, which sent ripples late Monday in the US as he signed a tranche of executive orders, including illegal immigration and naming cartels as global terrorist organizations. Interest rate probabilities suggest the BoJ would likely raise rates by 25 basis points to 0.50% for the first time since July last year.