FOREX: Yen slides to a one-and-half-year low, dollar struggles

The yen fell on Tuesday to its lowest since July 2024 while the dollar held most of its losses as investors fretted about the Federal Reserve's independence after the Trump administration opened a criminal investigation into Chair Jerome Powell.

The yen JPY= was the main mover in Asia hours, sliding to 158.975 per dollar, its weakest level since July 2024.

That followed news from Kyodo that Japanese Prime Minister Sanae Takaichi had conveyed to a ruling party executive her intention to dissolve parliament's lower house at the outset of its regular session scheduled to start on January 23.

The Japanese currency had already been under pressure this week after Hirofumi Yoshimura, leader of the Japan Innovation Party, said on Sunday that Takaichi might call an early general election.

"Markets will probably price in a scenario where Takaichi's coalition will gain more seats in the powerful lower house, and therefore that will enhance her ability to further loosen fiscal policy and potentially monetary policy," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

"So that's the main reason why the yen is selling off right now, on the back of those speculations."

The yen sank to record lows against the euro EURJPY= and the Swiss franc CHFJPY=, while also hitting its weakest level against the British pound GBPJPY= since August 2008.

Japan's Finance Minister Satsuki Katayama had earlier 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.

POWELL INVESTIGATION WORRIES INVESTORS

Investors were also still trying to come to grips with the Trump administration's investigation of Powell, a move that drew condemnation from former Fed chiefs and marked a dramatic escalation in the U.S. president's campaign to pressure the central bank into cutting rates faster.

The market reaction has been to sell the dollar and U.S. Treasuries, while the unease also prompted some investors to seek safety in gold. However, the selloff was much more measured than the one that followed the announcement of President Donald Trump's sweeping tariffs last April.

"The episode was mild, with losses in both USD and USTs fractional, as markets probably believe this is an act of threat that will blow over," said Vishnu Varathan, Mizuho's head of macro research for Asia ex-Japan.

The euro EUR= eased 0.08% to $1.1657, having risen as much as 0.5% in the previous session, while sterling GBP= was up 0.07% at $1.3475, extending Monday's 0.47% gain.

The Swiss franc CHF=, which had been buoyed by safety bids, was flat at 0.7976 per dollar, while the dollar index =USD recovered marginally to 99.01, having clocked its worst day in three weeks in the previous session.

"The picture for the dollar is somewhat mixed," said Sim Moh Siong, FX strategist at OCBC.

"In terms of what the Fed should do, the Fed should be more reluctant to cut rates, against data pointing to resilience of the economy... but there is also a question as to what the Fed would do eventually.

"If the political pressure on the Fed intensifies, the Fed may turn dovish and potentially cut rates much more than warranted by the economy."

While the Trump administration's latest move has done little to alter market expectations for two more Fed cuts this year 0#USDIRPR, it raises questions about the central bank's autonomy, a bedrock of U.S. economic policy and a cornerstone of its financial system.

Fitch Ratings said on Monday it views the Fed's independence as a key supporting factor for its AA+ U.S. sovereign rating.

U.S. Treasury yields steadied on Tuesday, with the benchmark 10-year yield US10YT=RR last at 4.1950%.

The two-year yield US2YT=RR rose to a three-week high of 3.5533%. US/

In other currencies, the Australian dollar AUD= eased 0.04% to $0.6707, while the New Zealand dollar NZD= rose 0.1% to $0.5777.

A private survey showed on Tuesday that Australia's consumer sentiment slipped in January as households wrestled with renewed rate jitters and an uncertain economic outlook.

Separately, a private think tank said New Zealand's business confidence in the fourth quarter improved and is now at its highest level since March 2014.

-Rae Wee/Reuters