The dollar is wobbling, but the dollar-yen pair might still have a long way to climb. UBS strategists say the yen could weaken sharply against the greenback, potentially hitting 175, if oil supply problems drag on.
Dollar Faces Pressure as Fed Rate Outlook Shifts
The U.S. Dollar recently headed toward its steepest weekly drop in months, shaken by expectations that the Federal Reserve might ease monetary policy further. President Trump’s calls for rate cuts have added fuel to those bets. But the yen has quietly gained ground, edging up against the dollar amid hawkish signals from Bank of Japan officials.
Still, the dollar index settled near 99.58, retreating from a six-month peak, while the yen hovered just above 156 per dollar. Thin liquidity due to the Thanksgiving holiday in the U.S. Has amplified market swings, making the currency landscape even more volatile.
Francesco Pesole, a forex strategist at ING, noted that Japan might intervene in the dollar-yen market if volatility spikes. But so far, the pair’s recent stall may have eased that urgency.
Investors remain split on the dollar’s path, with some betting on further losses if the Fed shifts toward easier policy.
Carry Trades and Market Turmoil Shake Yen Dynamics
The backdrop to all this is a massive unwinding of yen-funded carry trades that has roiled markets worldwide. Hedge funds and investors borrowed yen at near-zero rates for years, betting on steady yen weakness to fund higher-yielding assets abroad.
That trade has been worth hundreds of billions — some estimates range as high as $4 trillion.
Last week’s unexpected Bank of Japan rate hike sparked a sharp yen rally, forcing many to unwind these leveraged positions. Japan's Nikkei index tumbled into bear market territory, while the S&P 500 dropped 6% in just five days. The sudden squeeze has investors scrambling to gauge how much more selling lies ahead.
James Malcolm, a UBS Japan macro strategist, estimates about half of the $500 billion yen carry trade has been unwound. But analysts at J.P. Morgan suggest the total exposure could be as high as $4 trillion, highlighting how uncertain the full scale is.
Oil Disruptions May Push Dollar-Yen to New Heights
UBS’s chief investment officer, Mark Haefele, warns that ongoing oil supply disruptions could keep pressure on currencies. If the conflict affecting oil markets drags on, it could boost the U.S. Dollar further, especially against the yen. That’s because energy shocks tend to strengthen the dollar as a safe haven.
In this scenario, UBS sees the dollar-yen pair potentially climbing to 175, a level not seen in decades. Such a move would reflect persistent yen weakness amid global risk shifts and Japan’s steady monetary stance.
Haefele also suggests investors should rethink their currency bets, favoring the euro and Australian dollar over the greenback, given the dollar’s fading allure. But if the Fed appoints a rate cut advocate like Kevin Hassett as chair, that could press down on the dollar, shaking up those views.
Geopolitical Talks and Currency Uncertainty
Meanwhile, markets are watching Ukraine peace talks closely. President Putin mentioned a U.S.-Ukraine draft peace plan could shape future negotiations. If a deal emerges, it might lift the euro but hurt the Swiss franc—another safe haven currency. Yet for now, the franc remains supported by ongoing geopolitical risks.
Currency strategists remain cautious, pointing out that the euro’s recent strength might be overdone given uncertainties. Barclays’ Themos Fiotakis notes that while Europe had been gaining from rate spreads and economic growth, the U.S. Economy’s resilience could challenge that trend.
The dollar-yen outlook hinges on several moving parts: Fed policy shifts, Japan’s stance on intervention, the scale of carry trade unwinding, and how long oil supply shocks last. UBS’s call for a dollar-yen surge to 175 signals that the yen could remain under pressure even as markets digest last week’s turmoil.
