Something interesting is happening in financial markets today. The Japanese yen is rising across the board, yet bitcoin $BTC$77,877.45 and gold are trading higher as well, contrary to the conventional view that a strengthening yen is a risk-off signal. The reason seems rooted in the yen’s impact on the Dollar Index (DXY).
The dollar-yen (USDJPY) pair, one of the most heavily traded globally, has dropped by 1.4% to 156.40, extending Wednesday's 0.9% drop, according to data source TradingView. These are big moves for a major fiat currency like the yen, and it is leading to broad-based dollar weakness. For instance, EUR/USD, GBP/USD and AUD/USD are all trading slightly higher on the day.
The net effect is that the DXY, which measures the greenback's value against majors, has dropped by 0.4% to 99.22, testing its average over 200-days, which is used by traders to gauge long-term trends.
Should this level break, more pronounced dollar selling could follow, given the average is widely tracked by traders worldwide – a self-fulfilling dynamic.
A weaker dollar is typically supportive of USD-denominated assets like bitcoin and also eased financial conditions worldwide, which leads to more risk-taking in both markets and the economy. On the contrary, a stronger dollar is seen as a headwind for bitcoin.
Watch out for rapidly strengthening yen
The yen’s latest strength is pressuring the DXY and, for now, supporting bitcoin and gold. That dynamic could reverse quickly if the yen’s rally accelerates.
The reason? For over a decade, traders have taken cheap yen-funded bullish bets in stocks, bonds and even cryptocurrencies, and those can unwind if the yen surges in a disorderly way. Foreign investors who bought Japanese stocks on the back of a weak yen may sell. At the same time, Japanese traders who used cheap yen to buy overseas assets may liquidate. Both could lead to risk aversion.
A rapidly strengthening yen has previously weighed on bitcoin in the past, most notably during the unwinding of the yen carry trade in August 2024, when bitcoin fell roughly 20% within days.
Whether the yen continues to rally in an orderly or disorderly fashion is anybody’s guess. But the path of least resistance looks higher, with traders now pricing a greater chance the Bank of Japan raises rates from 1% to 1.25% at its Sept. 18 meeting.