The Japanese yen slipped to its lowest level in 18 months on Tuesday, trading at 158.975 per dollar. Meanwhile, the dollar struggled to recover from recent losses as concerns over the independence of the U.S. Federal Reserve loomed after the Trump administration launched a criminal investigation into its chairman, Jerome Powell.
Political Uncertainty Weighs on the Yen
The yen’s decline followed reports by Kyodo News that Japanese Prime Minister Sanae Takaichi plans to dissolve the House of Representatives at the start of its ordinary session on January 23. This political uncertainty has added pressure to the already struggling Japanese currency.
Hirofumi Yoshimura, leader of the Innovation Party, hinted on Sunday that Takaichi might call for early general elections. Analysts suggest this could strengthen her coalition’s position in parliament, enabling the government to implement more aggressive fiscal and monetary policies.
Carol Kong, a currency analyst at Commonwealth Bank of Australia, explained, “Markets likely expect Takaichi’s coalition to secure more seats in the powerful lower house, which would enhance her ability to ease fiscal and potentially monetary policies. This is the primary reason behind the yen’s sell-off at the moment.”
Federal Reserve Independence in Question
In the U.S., markets were rattled by the Trump administration’s decision to investigate Federal Reserve Chairman Jerome Powell. This move has drawn criticism from former Fed leaders and raised concerns about the central bank’s independence, a cornerstone of U.S. economic policy.
The market reaction included a sell-off in both the dollar and U.S. Treasury bonds. However, these losses were less severe than those seen after Trump’s sweeping tariff announcements in April 2025. Vishnu Varathan, head of macroeconomic research at Mizuho, noted, “The losses in both the dollar and Treasury bonds were partial, as markets likely believe this threat may pass.”
Mixed Performance in Global Markets
The euro fell slightly by 0.08% to $1.1657 after a 0.5% gain in the previous session. The British pound, on the other hand, continued its upward trend, rising 0.07% to $1.3475. The Swiss franc remained stable at 0.7976 per dollar, while the U.S. Dollar Index saw a modest recovery to 99.01 after recording its worst day in three weeks.
Elsewhere, the Australian dollar dipped 0.04% to $0.6707, while the New Zealand dollar edged up 0.1% to $0.5777.
Japanese Finance Ministry’s Concerns
Japanese Finance Minister Satsuki Katayama expressed shared concerns with U.S. Treasury Secretary Scott Bissonnette over what she described as a “unilateral devaluation of the yen.” Tokyo has also stepped up its warnings about potential intervention to stabilize the currency.
Looking Ahead for the Federal Reserve
The investigation into Powell’s leadership has not significantly changed market expectations for two additional rate cuts by the Federal Reserve this year. However, it has sparked questions about the central bank’s independence. Fitch Ratings recently reaffirmed the U.S.’s AA+ credit rating, citing the Fed’s independence as a key factor supporting the country’s strong financial position.
Sim Moh Siong, a foreign exchange analyst at OCBC, commented, “The outlook for the dollar remains mixed. The Fed may hesitate to lower interest rates given strong economic data, but political pressure could lead to more aggressive cuts than warranted.”
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