Published by Global Banking & Finance Review®
Posted on February 4, 2026
4 min readLast updated: February 4, 2026
Add as preferred source on GoogleThe dollar holds steady while the yen fluctuates ahead of Japan's election, with global markets reacting to U.S. political developments.
By Laura Matthews
NEW YORK, Feb 4 (Reuters) - The dollar rose against the yen on Wednesday, setting up the Japanese currency for a fourth straight day of losses ahead of elections that are expected to boost Prime Minister Sanae Takaichi's fiscal and defence-spending ambitions.
The greenback also ticked up against most other major currencies, including the euro and the pound, after the Institute for Supply Management said on Wednesday that the U.S. services sector held steady in January, although rising input costs signalled a possible rebound in services inflation after recent easing.
Markets were closely watching the report after a partial U.S. government shutdown, which ended late on Tuesday, delayed the release of key jobs data due on Friday. The delay in the data, now due for release next week, added to uncertainty over the U.S. Federal Reserve's interest rate path.
For now, the dollar is stuck within its recent ranges as traders weigh whether the technology-led equity slump is classic risk-off, which typically lifts the dollar, or "a deterioration in the U.S. economy's crown jewels, the tech sector," said Steve Englander, head of global G10 FX research at Standard Chartered Bank.
"I think they are having a hard time figuring out what the answer is."
The yen was last down 0.7% at 156.82 per dollar, after hitting its weakest level since January 23, when the currency strengthened sharply from 159.23 amid speculation the New York Federal Reserve conducted rate checks. U.S. Treasury Secretary Scott Bessent denied last week that Washington was intervening to support the yen, stating that the U.S. has a strong dollar policy.
The yen has dropped more than 2% since January 30.
Takaichi earlier this week triggered a yen selloff after a campaign speech in which she talked up the benefits of a weaker currency. While she later walked back the comments, there are lingering worries that mixed signals from the prime minister could hurt efforts to support the frail currency.
"Markets are being driven by Japan election risks, cooling euro zone inflation, and a renewed focus on U.S. growth and labor momentum, leaving the dollar modestly supported while the yen remains the clear underperformer," said Joel Kruger, market strategist with LMAX Group in London.
"Attention is squarely on what incoming activity and employment signals mean for the outlook, with the Federal Reserve still expected to stay on hold near term - while softer labor trends would pull forward rate-cut expectations and firmer resilience would push easing further out, keeping FX and rates highly sensitive to macro data."
U.S. DATA IN FOCUS
The dollar jumped against the euro and the yen last week after U.S. President Donald Trump chose former Fed Governor Kevin Warsh to head the U.S. central bank when Jerome Powell's leadership term ends in May, easing concerns about an overly dovish Fed.
Warsh has argued that productivity gains from artificial intelligence could justify easier policy, while calling for a smaller Fed balance sheet in a mix that would steepen the yield curve but leave the broader interest rate direction uncertain.
"Current data suggest the economy remains stable but not necessarily robust enough to generate sustained conviction in FX markets," said Uto Shinohara, senior investment strategist, Mesirow Currency Management, Chicago. "Market pricing for Fed policy remains close to two cuts."
The dollar index, which measures the greenback against six major currencies, rose 0.24% to 97.63.
The Australian dollar fell 0.37% to $0.6996, after a sharp 1% rise in the previous session as the Reserve Bank of Australia hiked interest rates.
The yuan has been clocking steady gains. While analysts think authorities in Beijing will resist further strengthening, the risks are to the upside and China's fragile economy could be tested.
STRONG EURO MIGHT AFFECT ECB PATH
The euro slipped 0.11% to $1.1806, ahead of the European Central Bank's policy decision on Thursday, with investors keen on any comments about how the single currency's valuation might affect the policy path.
The euro hit a 4-1/2-year high at 1.2084 last week as policymakers flagged growing concerns over its quick appreciation, warning that it could drag inflation down even as price growth is already set to undershoot the ECB's 2% target.
Analysts said the euro-dollar trade has recently been driven almost entirely by sentiment over the greenback while interest rate differentials remained in the background.
(Reporting by Laura Matthews in New York; Additional reporting by Stefano Rebaudo in Milan; Editing by Andrew Heavens, Alexander Smith, Paul Simao and Edmund Klamann)
The U.S. dollar is the official currency of the United States and is widely used as a global reserve currency.
The yen is the official currency of Japan, symbolized as ¥, and is one of the most traded currencies in the world.
A central bank is a financial institution that manages a country's currency, money supply, and interest rates.
Economic growth is the increase in the production of goods and services in an economy over a period of time, typically measured by GDP.
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