Yen Rallies Amid Faster BoJ Rate Hike Bets and Weaker USD

The Japanese yen strengthened against the US dollar on Tuesday after hitting a two-week low, as investors reassessed their expectations for a Bank of Japan (BoJ) interest rate hike and took note of weaker-than-expected US economic data.

Momentum for a BoJ rate increase picked up in mid-January 2026, with swap markets indicating a roughly 70% probability of a 25-basis-point hike by April, up from around 50% a week earlier. This shift is attributed to recent comments from BoJ officials and stronger-than-anticipated inflation figures.

The US dollar softened on Tuesday after the release of softer retail sales and employment data, which dampened expectations for further Federal Reserve rate increases. The US Dollar Index (DXY) fell 0.3% on the day, making the yen relatively more attractive.