The US dollar fell sharply on Tuesday ahead of a slew of economic data that will shape the direction of interest rates, while the yen maintained its gains following Prime Minister Sanae Takaichi's landslide election victory.
At 9.40am, the US Dollar Index (DXY) was at 96.922, up 0.06% since it opened in early Asian trading on Tuesday.
Analysts expect the Japanese yen to continue to weaken in the long term, with market focus shifting to the direction of fiscal policy under Prime Minister Sanae Takaichi.
Since he took over as leader of the Liberal Democratic Party (LDP) in October, the yen has fallen by around 6%, reflecting investor concerns over the potential for an expansion of fiscal stimulus.
Fiscal policy, which is expected to remain loose under a more aggressive Takaichi administration, could support the dollar's strength against the yen.
The market is predicting that the USD/JPY pair could rise to 164 by the end of the year, in line with expectations of a significant interest rate differential between the United States and Japan.
Meanwhile, investors' attention this week is focused on key US economic data, particularly the monthly jobs report and Consumer Price Index (CPI) inflation.
The data is expected to be slightly affected by the three-day government shutdown that just ended, thus increasing uncertainty about the direction of the US economy in the near term.
White House economic advisor Kevin Hassett expects US job growth to moderate in the coming months, influenced by slower labor force growth and improved productivity.
This situation has prompted investors to reassess whether the pressure in the labor market has truly subsided.
The market is now fully focused on several key US economic data series, including the ADP NFP report and inflation data, which are expected to be the main drivers of the dollar's movement in the near term.
Pressure on the dollar is expected to continue if job growth records a reading below market expectations.
According to a Reuters poll, the January ADP NFP report, to be released on Wednesday, is expected to show an increase of around 70,000 jobs.
