FOREX-Yen tumbles on Japan spending fears, dollar broadly higher

By Karen Brettell

NEW YORK, Jan 13 (Reuters) - The Japanese yen tumbled to its weakest level against the U.S. dollar since July 2024 on Tuesday on concerns about looser fiscal and monetary policy in the country.

The dollar was broadly higher following a brief dip on data showing that consumer prices were largely as economists expected last month.

Japanese Prime Minister Sanae Takaichi may call an early general election, the head of her party's coalition partner said on Sunday, after media reported she was considering a February vote.

It would give Takaichi a chance to capitalize on the strong public approval ratings she has enjoyed since taking office in October.

“The implications for the yen are quite negative because Takaichi is a dove on both the fiscal and monetary fronts, so fiscally she would be very comfortable with a looser, higher deficit policy,” said Eric Theoret, currency strategist at Scotiabank in Toronto.

The Japanese yen JPY= weakened 0.6% against the greenback to 159.11 per dollar.

The rapid weakening in the yen is also putting traders on watch for a possible intervention to shore up the currency.

Japan's Finance Minister Satsuki Katayama said she and U.S. Treasury Secretary Scott Bessent shared concerns over what she called the yen's recent "one-sided depreciation", as Tokyo stepped up threats of intervention to stem the currency's fall.

The U.S. currency briefly dipped after consumer prices were seen as potentially giving the Federal Reserve more room to cut rates as policymakers balance concerns about still sticky price pressures against a weakening labor market.

"Today's data adds further support to the notion that inflation is trending down," Preston Caldwell, chief U.S. economist at Morningstar, said in a note.

The Consumer Price Index rose 0.3% last month for an annual gain of 2.7%, while core CPI rose by 0.2% in December for a 2.6% year-on-year increase.

Market reaction suggests that traders were positioned for a potentially larger increase in prices, said Theoret, noting risk-sensitive currencies including the Australian dollar rallied after the report.

“There's a concern now that we've maybe reached the local lows in terms of inflation,” Theoret said. “Maybe people were positioned for the alternative, which would have been an upside surprise.”

Fed officials are hedging about how much rising productivity will help return inflation to the U.S. central bank's 2% target, reiterating this week they need to keep interest rates at current levels until it becomes clearer that price pressures will ease.

The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro,
was last up 0.28% at 99.15, with the euro EUR= down 0.17% at $1.1647.

Sterling GBP= weakened 0.23% to $1.3428.

The Australian dollar AUD= was last down 0.45% versus the greenback at $0.668, after briefly bouncing to $0.6725 on the data.

The dollar was boosted on Friday after data showed solid jobs growth in December, which further boosted expectations that the U.S. central bank will keep rates on hold at its January 27-28 policy meeting.

Fed funds futures traders' pricing shows that a cut is not seen as likely until June.

Traders are also considering the issue of Fed independence after the U.S. Department of Justice threatened to indict Federal Reserve Chair Jerome Powell in connection with a building renovation project.

Global central bank officials issued a coordinated statement of support for Powell on Tuesday.

U.S. President Donald Trump is expected to announce in the coming weeks his candidate to replace Powell as chair when his term ends in May. Trump said on Tuesday that December's inflation data supported his push for Powell to cut rates.

Rising geopolitical tensions also remain a focus after the United States took Venezuelan leader Nicolas Maduro into custody and as protests rock Iran and Trump expresses his desire for the U.S. to acquire Greenland.

Traders are also watching for a Supreme Court decision on the legality of Trump’s tariff policies, which could come as soon as Wednesday.

In cryptocurrencies, bitcoin BTC= gained 3.12% to $93,811.