FOREX-Dollar slips across the board; yen higher on intervention risk

By Saqib Iqbal Ahmed and Samuel Indyk

NEW YORK, Jan 26 (Reuters) - The U.S. dollar slipped across the board on Monday and the Japanese yen jumped to a more than two-month high on Monday as speculation mounted of coordinated currency intervention by authorities in the U.S. after remarks from Tokyo's prime minister and Japan's leading currency diplomat.

Investors also scaled back their dollar positions ahead of a Federal Reserve meeting and a possible announcement by the Trump administration of a new Fed chair. Worries about another U.S. government shutdown also pressured the dollar.

The dollar was 1.3% lower against the yen JPY= at 153.73, on pace for a nearly 3% slide over the last two trading sessions, the worst such weakening since the August 2024 when the Japanese currency appreciated sharply due to an unwind of the popular yen carry trade.

Tokyo continued to preoccupy investors after Japan's Prime Minister Sanae Takaichi said on Sunday her government would take the "necessary steps" against speculative market moves.

PRECURSOR TO INTERVENTION

A source on Friday told Reuters that the New York Federal Reserve had checked dollar/yen rates with dealers, which is considered to be a precursor to intervention. The rush to exit short yen positions has lifted the currency by over 3% off Friday's low.

"Clearly if you've got both the MOF (Japanese Ministry of Finance) and the U.S. Treasury looking to limit the upside in dollar-yen, that's going to be a more powerful driver," said Dominic Bunning, head of G10 FX strategy at Nomura.

Japanese Finance Minister Satsuki Katayama declined to comment on the rate checks, while currency diplomat Atsushi Mimura said the government would maintain close coordination with the United States on foreign exchange and act appropriately.

The U.S. has not joined a coordinated effort to intervene in the Japanese currency since March 2011, when it sold yen following the Fukushima earthquake.

The yen is under pressure in part because of concerns over Japan’s government debt that stands at more than double its economic output. A historic rise in market interest rates has raised fears for Japan’s ability to service its debt, but Takaichi has said she will cut taxes as she campaigns for a snap election on Feb 8.

Bank of Japan money market data on Monday indicated that a spike in the yen rate against the dollar on Friday was unlikely to be the product of official Japanese intervention.

DOLLAR SELLOFF BOOSTS EURO AND STERLING

Dollar selling on Monday helped push the euro EUR= and the British pound GBP= to four-month highs, while the Australian dollar AUD= hit its strongest since September 2024.

The euro was last up 0.4% at $1.1857, sterling was 0.3% higher at $1.36945, while the Aussie advanced 0.4% to $0.6922.

"This is a reinvigorated 'Sell America trade,' and it has to do with prediction markets showing that government shutdown is back on the table," Jonathan Petersen, macro strategist at investment research firm Variant Perception.

The top Democrat in the U.S. Senate, Chuck Schumer, said his party would vote against funding legislation that includes money for the Homeland Security Department that oversees ICE, the federal immigration agency. Congress faces a January 30 deadline to fund the government or risk a partial government shutdown.

"The dollar has been fragile anyway, but the gain in the yen has been the precipitating trigger for the market to sell it across the board," said Marc Chandler, chief market strategist at Bannockburn Capital Markets in New York.

"There are a lot of things going on right now in the U.S. like the protests against the latest Minnesota shooting. Trump could also be naming the successor to Jay Powell this week. So the markets are nervous about both."

U.S. President Donald Trump said on Thursday he would soon announce his pick for the next Federal Reserve chair, to replace Chair Jerome Powell, with BlackRock's Rick Rieder now favourite on betting site Polymarket with a 48% probability.

The U.S. Federal Reserve sets interest rates on Wednesday, with markets expecting no changes but for policymakers to flag further cuts, with about 50 basis points of easing priced in for the year.