USD to JPY Exchange Rate May Have Peaked, Eurizon Sees Yen Strengthening to 125

Key Takeaways:

Eurizon SLJ Capital says the historic US-Japan currency intervention may represent a turning point for the yen, arguing that the USD to JPY exchange rate has probably reached its peak. Although USD/JPY has rebounded to around 159.25 after falling from nearly 164 to 155, the firm believes continued policy support could eventually drive the pair toward 125. Interest-rate differentials and carry trades remain near-term obstacles.

The first coordinated US-Japan purchase of yen since 1998 may have fundamentally changed the currency’s long-term outlook, according to Eurizon SLJ Capital.

Stephen Jen, the asset manager’s chief executive, and economist and portfolio manager Joana Freire said in a note that USD/JPY has “most likely peaked” because neither Washington nor Tokyo is likely to surrender its position to speculative markets.

Their argument centers on the policy signal created by the intervention: both governments now appear committed to preventing another uncontrolled decline in the Japanese currency.

The yen had fallen to almost 164 per dollar in late July, approaching its weakest level in around four decades. Coordinated intervention subsequently pushed USD/JPY down to approximately 155, producing one of the currency’s strongest rallies in years.

Yen Gives Back More Than Half of Its Intervention Rally

The intervention has not produced an uninterrupted recovery. USD/JPY traded near 159.25 during early Asian trading on August 12, meaning the yen has surrendered more than four yen of the approximately nine-yen move triggered by official action.

The Japanese currency also recorded a decline of about 1% on Monday, its steepest daily loss in more than two months. The reversal illustrates the continuing influence of the wide interest-rate gap between the United States and Japan.

Japan’s policy rate stands at 1.00%, while the upper end of the Federal Reserve’s target range is 3.75%. That differential encourages investors to borrow in low-yielding yen and purchase higher-returning overseas assets—a strategy known as the carry trade.

Nevertheless, speculative positioning has begun to change. Commodity Futures Trading Commission data covering the week through August 4 showed that hedge funds reduced their bets against the yen following the intervention. The adjustment suggests traders are becoming more cautious about maintaining large short positions when both governments have demonstrated a willingness to enter the market.

Eurizon Sees USD/JPY Eventually Falling Toward 125

Eurizon SLJ expects the yen could eventually strengthen to around 125 per dollar, although the firm did not provide a specific timetable for reaching that level.

A decline in USD/JPY from approximately 159.25 to 125 would represent a fall of about 21.5% in the currency pair. Such a move would require more than repeated market intervention. It would probably also depend on a sustained narrowing of the US-Japan interest-rate gap, changes in Japanese capital flows and a broader weakening of the dollar.

Jen and Freire nevertheless view the coordinated action as a “watershed moment.” Their forecast rests on the belief that traders should not underestimate the combined resources or determination of the US and Japanese authorities.

The projection is considerably more bullish on the yen than prevailing market pricing. USD/JPY remains within reach of the psychologically important 160 level, where concerns about another round of intervention are likely to intensify.

US Support Could Also Protect the Treasury Market

Washington’s participation may reflect concerns extending beyond the exchange rate itself.

Japan is one of the world’s largest foreign holders of US government debt. If Tokyo were forced to sell significant quantities of Treasuries to obtain dollars for yen-buying operations, those sales could increase bond supply, push Treasury prices lower and raise long-term US borrowing costs.

The Federal Reserve’s Foreign and International Monetary Authorities repo facility provides an alternative. Japan can pledge Treasury securities as collateral in exchange for dollar liquidity, reducing the need to sell bonds directly into the market.

US Treasury Secretary Scott Bessent has indicated that Washington remains prepared to support Japan. That message has strengthened expectations that the July operation may form part of a broader intervention framework rather than a one-time transaction.

Monetary Policy Still Determines the Longer-Term Direction

Despite Eurizon’s optimistic forecast, recent price action shows that intervention alone has not eliminated the yen’s structural weakness.

Japan’s relatively low interest rates, persistent demand for foreign assets and concerns about the country’s fiscal position continue to support USD/JPY. The rebound toward 159 also indicates that investors remain willing to test the authorities’ resolve.

The Bank of Japan’s next policy decisions will therefore be critical. A faster tightening cycle could reduce the attractiveness of yen-funded carry trades and provide fundamental support for the currency. Conversely, a cautious approach would leave the existing yield disadvantage largely intact.

US monetary policy is equally important. Softer inflation or employment data could reduce expectations of further Federal Reserve tightening, lowering Treasury yields and helping the yen. Stronger US inflation would have the opposite effect and could push USD/JPY back toward 160 or beyond.

The joint intervention may have created a credible ceiling near the late-July high of 164. Whether it becomes the lasting turning point envisioned by Eurizon will ultimately depend on monetary policy and capital flows—not official currency purchases alone.

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