The end of 2023 eventually saw the dollar weaken steadily throughout the post-Christmas period, and although the Fed’s interest rate cut is still some way off, the market is folding in. This is expected to be the main trend this year.

However, due to the Noto Peninsula earthquake in Japan on New Year’s Day, financial markets have opened with a risk-off market starting the next day from Japan. The dollar’s rise against the yen has been particularly impressive, rising from the upper ¥140s in the early morning hours of 2 January to the ¥145s at the foot of the day. The level has been steadily rising by more than one yen each day. Throughout the week, risk-off buying of the dollar led to a settlement of the dollar/yen selling, and the strong employment report and the rate hike statement from the Fed Governor made this week a week of dollar strength.

Stocks rose and the dollar fell because US interest rates fell. If US interest rates were to remain high, negating the current March rate cut, the dollar would rise and US stocks might fall further.

However, the published FOMC minutes were not as hawkish as feared. Although hawkish at first glance, it states that the FOMC intensively analysed the risks of continued high interest rates leading to an economic slowdown. This part of the report is probably essential.

In terms of the dollar’s strength, the underlying support came from rising US Treasury yields, which the FOMC minutes indicated would remain high for a longer period of time. The prospect of interest rate cuts starting by the end of the year did not have the same dovish shock impact as at the FOMC meeting. An adjustment to the trend of dollar weakness in the second half of last year was also noted ahead of today’s release of the US employment data.

In terms of the yen’s depreciation, unclear statements by BOJ Governor Ueda have dampened market expectations for an early lifting of negative interest rates. The Noto Peninsula earthquake of 2024, which occurred on 1 January, has also weakened the market’s view of an early lifting of negative interest rates. The yen is also showing signs of depreciation, as the cross currency is rising along with the US dollar and the yen.

However, it appears that interest rates will eventually fall again and the dollar will return to its weak stock market phase. Even if there is a slight reversal, the basic strategy should be to sell the dollar, and buying US Treasuries, buying US equities, selling USD/JPY, buying Aussie/USD and buying XAU (gold)/USD are recommended. Overseas investors will start work tomorrow, so they may quickly set up and move. If it moves in the direction ahead, follow it honestly, and if it reverses once the settlement is made, you can get in when it starts moving again.

The market trend last week was that this “once the settlement is in” came to pass. Basically, we are watching the dollar weakening in the same direction as last week, and this week there are two consecutive price index releases on Thursday and Friday, so depending on the results, will the dollar move up one more notch or down one more notch? Is the dollar still weakening? The results of these will determine the direction of the dollar.

On the risk side, with regard to the yen, the risk of a delay in the BOJ’s policy normalisation due to the 2024 Noto Peninsula earthquake has become apparent. If this is the case, the market may attack again by buying the yen crosses.