Yen Steadies on Intervention Watch as Euro Digests German Political Shock

The Japanese yen steadied on Monday after a sharp sell-off last week, with traders on high alert for potential government intervention to support the currency. Meanwhile, the euro held in a narrow range as markets assessed fresh political uncertainty in Germany, all while the U.S. dollar maintained its recent strength.

Yen Halts Slide on Intervention Threat

The dollar was trading around 156.85 yen, pausing its recent climb. The yen found support after a report from Nikkei on Friday stated that the Bank of Japan (BOJ) had conducted a "rate check," a practice where central bank officials call dealers to ask for currency prices. This move is widely seen by traders as a potential precursor to direct market intervention.

Caution was heightened by thin market conditions, as Japanese financial markets were closed for a three-day holiday. Historically, authorities have sometimes used such periods of low liquidity to maximize the impact of their actions. The yen's slide last week, which saw it fall about 2%, was triggered by the BOJ's decision to raise interest rates to 1.25%, a 31-year high. However, the move was perceived as a "dovish hike," prompting a sell-the-news reaction that pushed authorities to issue verbal warnings.

Euro Grapples With German Political Uncertainty

The euro hovered near $1.1482, with investors digesting the results of a key state election in Germany. Projections showed the far-right Alternative for Germany (AfD) party winning the election, dealing a significant blow to the country's mainstream ruling coalition and raising the political risk premium for European assets.

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Despite the political headwinds, the euro found some support from falling energy costs. Market participants are now looking ahead to speeches later in the day from European Central Bank President Christine Lagarde and Executive Board member Piero Cipollone for any new signals on the future path of interest rates.

Hawkish Fed Keeps Dollar Buoyed

The U.S. dollar remained firm against a basket of major currencies, with the Dollar Index holding steady at 100.23. The dollar's strength follows a more than 1% gain last week, driven by a hawkish stance from the Federal Reserve, which raised its policy rate by 25 basis points to a range of 3.75%-4.00%.

According to the CME FedWatch Tool, money markets are now pricing in a 55% probability of another 25-basis-point hike at the Fed's October meeting, up from 42% a week ago. Traders are also monitoring geopolitical developments, including preparatory talks between U.S. and Chinese officials ahead of an anticipated leadership summit in Washington.