The Dollar’s Disappearing Act

🧠 The Dollar’s Disappearing Act

As confidence in U.S. leadership erodes and Japan reawakens, the yen is quietly setting up for a sharp rally.

The U.S. dollar is finally showing signs of fatigue. Not because the Fed has flipped dovish (it hasn’t). Not because inflation is suddenly under control (it isn’t). But because structural cracks are beginning to widen beneath the surface of dollar exceptionalism.

The Japanese yen, long the sacrificial lamb of monetary divergence, is beginning to stir. Nomura’s FX strategy team is calling for a 6% rally in the yen by the end of Q3, targeting USD/JPY at 136. Some analysts are going further, projecting a return to the ¥120s — a level not seen consistently since before April 2022.

They are not alone.

📉 From YCC to Normalisation: Japan Joins the Race

The Bank of Japan ended its ultra-loose monetary policy last year. In January, it raised short-term rates to 0.5% — its first hike in over a decade. The move was grounded in a belief that Japan was finally on the verge of durably hitting its 2% inflation target.

Yes, the BOJ revised its growth forecasts lower in May, citing the economic drag from rising U.S. tariffs. But the direction of travel remains clear. Policy normalisation is underway.

And Washington is quietly cheering it on.

In its latest report, the U.S. Treasury backed further rate hikes in Japan, stating:

“BOJ policy tightening should continue... supporting a normalization of the yen's weakness against the dollar and a much-needed structural rebalancing of bilateral trade.”

Translation: They would rather Japan hike rates than start selling Treasuries

📉 A Currency Losing Its Luster

The U.S. dollar has depreciated approximately 10% year-to-date, reaching a three-year low. This decline reflects growing concerns over the country’s economic trajectory and fiscal policies. Factors contributing to the dollar’s weakness include:

• Political Interference in Monetary Policy
  Reports suggest the President is considering replacing Federal Reserve Chair Jerome Powell before his term ends in May 2026, aiming to install a more dovish successor. Such actions have raised alarms about the Fed’s independence and further eroded investor confidence.

• Rising Fiscal Deficits
  The introduction of the "Big, Beautiful Bill" is projected to add over $3.0 to $4.0 trillion to the federal debt, exacerbating concerns about U.S. fiscal sustainability.

• Trade Policy Uncertainty
  The administration’s tariff implementations have led to fears of a stagflationary slowdown. JPMorgan forecasts GDP growth could slow to 1.3% in 2025.

🌐 Global Implications

The dollar’s decline carries significant ramifications:

• Shift in Safe-Haven Assets
  During the recent Middle East conflict, traditional safe havens like the U.S. dollar and Treasury bonds did not attract the usual investor demand. This suggests a potential shift in global risk perceptions.

• Capital Outflows
  Investors are increasingly reallocating portfolios away from U.S.-centric assets, seeking opportunities in international markets, commodities, and alternative currencies.

🦉 Imperfect Hedge View: USDJPY at 130 in 6 Months, 115 in 6 - 12 months

The confluence of political maneuvers, fiscal expansion, and trade uncertainties is undermining the U.S. dollar’s longstanding position as the world’s reserve currency. While short-term fluctuations are inevitable, the current trajectory points to a more profound and lasting shift in global financial dynamics.

Our view at Imperfect Hedge:

• 6-month target: USDJPY = 130

• 6 to 12-month target: USDJPY = 115

Sources:

Nomura USDJPY 136 Forecast
“Nomura sees the risk of a USDJPY drop to 136 by end-Q3.”
BOJ Policy Tightening and Rate Hike to 0.5%
“BOJ raised interest rates to 0.5% in January 2025, ending years of ultra-loose policy.”
– Reuters, March 18, 2025

U.S. Treasury Urges BOJ to Continue Hiking
“BOJ policy tightening should continue in response to domestic fundamentals... supports yen normalisation.”
– U.S. Treasury Report quoted in Reuters, June 6, 2025

BOJ Cuts Growth Forecasts in May 2025
“BOJ cuts growth forecasts due to economic drag from U.S. tariffs.”
– Bloomberg, May 28, 2025

Plaza Accord Background / Historical USD/JPY Context
“From the Plaza Accord to now: USDJPY’s long arc.”
– Financial Times archive

US Senate version of Trump tax-cut bill would add $3.3 trillion to debt, CBO says

– Reuters 30 June 2025