U.S. Dollar Faces Worst Weekly Decline in a Year as Yen Struggles

Impact of Geopolitical Tensions on Currency Markets

By Ankur Banerjee

U.S. Dollar Performance

SINGAPORE, Jan 23 (Reuters) - The U.S. dollar was poised for its biggest weekly drop in a year after President Donald Trump's Greenland threats and abrupt reversal unnerved investors, while the yen wobbled near one-week lows ahead of the Bank of Japan policy decision later on Friday.

Yen's Ongoing Struggles

The shifting geopolitical landscape has weighed on sentiment this week as Trump said he had secured U.S. access to Greenland in a deal with NATO that came as he backed off tariff threats against Europe and ruled out taking the autonomous territory of Denmark by force.

Market Reactions to BOJ Decisions

The dollar has borne the brunt of investor angst in the currency markets as U.S. assets were pummelled at the start of the week amid the intensifying geopolitical tensions.

The dollar index, which measures the U.S. currency against six units, was at 98.329 after dropping 0.58% in the previous session, on course for a 1% slide, its worst performance in a week since January 2025.

The euro was steady at $1.1751, hovering near the three-week high it touched earlier this week, while sterling fetched $1.3496, near a two-week high hit in the previous session.

Thierry Wizman, global FX & rates strategist at Macquarie Group, said while a Greenland deal solves the immediate problem of tariffs and invasion, it doesn't solve the core issue of the seeming alienation of allies from one another.

"And that's not a good place to be if you want to preserve the USD's reserve-currency status."

STAGE SET FOR BOJ, UEDA

Investor focus on Friday will be on the BOJ decision where the central bank is broadly expected to keep rates steady after it raised its policy interest rate to a 30-year high last month.

The spotlight will be on comments from Governor Kazuo Ueda to gauge when the next hike will come and whether there is any hawkish tilt from policymakers to help support the frail yen.

The yen has been under relentless pressure since Sanae Takaichi took over as Japan's prime minister in October, dropping over 4% on fiscal concerns and hovering near levels that have spurred verbal warnings and intervention fears. It wobbled at 158.50 per U.S. dollar in early Asian hours and was on course for a fourth straight weekly drop, a run it last had in September. Traders fear a break beyond 160 could prompt Tokyo to step into the currency market to support the yen.

Magdalene Teo, head of fixed income research for Asia at Julius Baer, said the yen continues to be sold as investors fear that the BOJ’s monetary policy remains too accommodative while inflation risk rises.

"For sustainable JPY appreciation, this would require significant investment domestically and a strong belief that Takaichi’s administrative policies will eventually translate into growth and fiscal health and not lead to a collapse."

Data on Friday showed Japan's core consumer inflation slowed in the year to December but stayed above the central bank's 2% target, keeping alive market expectations of future interest rate rises.

A bond market rout this week underscored investor nerves about Japan's fiscal position as Takaichi called a snap election and promised tax cuts, sending Japanese government bond yields to record highs.

Carol Lye, portfolio manager at Brandywine Global, said the authorities have to come up with a more concrete plan. "If there's no action, then it's just words. It's not going to anchor the market down."

"And until they do, I think there's still room for the JGBs across the entire curve to continue being volatile. The rate hikes are also not coming in quickly enough."

In other currencies, the Australian dollar was steady at $0.6841, while the New Zealand dollar was 0.25% weaker at $0.5914.

Bitcoin advanced 0.37% to $89,518.13, inching away from the -eek low it touched earlier this week.

(Reporting by Ankur Banerjee in SingaporeEditing by Shri Navaratnam)