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Dollar Pressure Mounts as Traders Reopen Debasement Debate.
foreign exchange :: 2026-01-26 :: source - bloomberg
By Ruth Carson
(Bloomberg) -- The prospect of the US actually joining Japan in foreign-exchange intervention is just the latest in a series of blows to a currency that’s already under pressure on multiple fronts.
The dollar weakened against most major peers, the yen jumped and gold hit a record Monday as investors debated how any joint intervention to support Japan might further worsen sentiment toward the greenback. The US currency just experienced its worst week since May, after unpredictable Washington policymaking rattled financial markets. In options, pricing on the greenback headed for its most bearish level since at least 2011.
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For many dollar watchers, signs of US support to boost the yen re-opens the argument about potential co-ordinated currency intervention to guide the greenback lower against key trading partners. The thinking goes that such a pact would help American exporters compete with rivals such as China and Japan, even if it raised questions about the long-term value of the world’s reserve currency.
In the US, the Treasury Department sets currency policy and would authorize any intervention, which is then typically carried out by the Federal Reserve acting as its agent.
“If the New York Fed chooses to join in, then that would amplify the yen rally — and not just for symbolic reasons,” said Gareth Berry, strategist at Macquarie Group Ltd. “Japan has lots of dollars to sell, but the NY Fed has an infinite amount. It would also be interpreted as a sign that Trump wants a weaker dollar more generally.”
The Bloomberg Dollar Spot Index has fallen more than 9% since the beginning of last year. Risks around Fed independence and expectations that Chair Jerome Powell’s successor will be swayed by President Donald Trump to rapidly lower interest rates have weighed on the US currency as have a growing budget deficit, worries about fiscal profligacy and widening political polarization.
The discussion on a potential currency pact reignited Friday when traders reported that the Federal Reserve Bank of New York had contacted financial institutions to ask about the yen’s exchange rate. Wall Street saw those inquiries as potentially laying the ground for Japan to intervene with help from the US.
Co-ordinated intervention to prop up the yen is rare, with one occasion happening in 1998 and another being the Plaza Accord, a 1985 deal between the US, France, Japan, the UK and then West Germany to weaken the dollar.
Early last year, analysts debated the likelihood of a so-called Mar-a-Lago Accord, prompted by a research paper by Trump administration economist and now-Federal Reserve board member Stephen Miran on deliberately weakening the dollar.
“When the US Treasury starts making calls, it’s usually a sign this has moved past a normal FX story,” said Anthony Doyle, chief investment strategist at Pinnacle Investment Management. “The potential of coordinated action caps dollar-yen upside and makes the long dollar trade more fragile.”
Options show traders are paying up for protection against a weaker greenback. Risk reversals, which capture positioning and sentiment, have shifted not only in yen pairs but across major currencies. On the euro, for instance, sentiment has turned the most bullish since May.
Demand has also risen for options that pay out if currencies experience larger-than-expected swings. Traders are now the most convinced since April that the euro will make a sizable move against the greenback over the next month.
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The yen strengthened more than 1% in Asia trading Monday, while Bloomberg’s dollar gauge fell 0.4%, extending last week’s 1.6% decline. That came after Trump brandished tariffs on Europe over his bid for Greenland, then abruptly dropped them. On Saturday, he threatened 100% tariffs on Canada if it reached a trade deal with China.
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Elsewhere on Monday, gold rose beyond $5,000 an ounce for the first time. Precious metals are in the midst of a record rally as heightened geopolitical risks have added impetus to the so-called debasement trade, whereby investors retreat from fiat currencies.
In Asia, a number of currencies rose to notable levels with the Singapore dollar at its highest since 2014 and the Malaysian ringgit at its strongest since 2018 against the greenback. Korea’s won jumped more than 1% — earlier this month US Treasury Secretary Scott Bessent offered rare verbal support to the currency.
To be sure, there’s still debate about whether the Trump administration actually favors a weaker dollar. Bessent said last year that the US continues to have a “strong dollar” policy and dismissed concerns about the greenback’s status as the world’s key currency.
“The price of the dollar has nothing to do with a strong dollar policy,” Bessent told Bloomberg Television at the time.
For Daniel Baeza, senior vice president at Frontclear, any sign of co-ordinated action could hit sentiment toward the greenback.
“The bigger signal is policy coordination,” he said. “If markets interpret coordination as a willingness to tolerate easier global dollar conditions, especially alongside a dovish Fed reaction function, that could reinforce short-term dollar downside.”
--With assistance from Vassilis Karamanis.
(Adds options pricing.)
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