The Japanese yen experienced dramatic volatility on Friday, with two sudden spikes prompting widespread market speculation that authorities had conducted rate checks with banks, often viewed as a precursor to direct currency intervention. The yen strengthened significantly during the trading session, closing at 155.855 per dollar after experiencing considerable weakness earlier in the day.

Yen Volatility and Intervention Speculation

The currency's dramatic movements came after the yen had weakened to as low as 159.2 per dollar during a press conference by Bank of Japan Governor Kazuo Ueda, following the central bank's decision to hold rates steady. This level represented close to 18-month lows for the Japanese currency, raising concerns among market participants about potential government intervention.

Shortly after Ueda's press conference, the yen suddenly strengthened to 157.3 per dollar. Market consensus suggested that while authorities had not intervened directly, they had likely conducted rate checks with banks. A rate check involves authorities asking banks what price they would receive if intervention were to occur, serving as a signal of readiness to enter the market.

"Given the lack of news, the only thing I can really see is just this underlying bearish sentiment fear of intervention," said Marc Chandler, chief market strategist at Bannockburn Capital Markets. Erik Bregar, director of FX & precious metals risk management at Silver Gold Bull, noted the uncertainty: "It's late in the week and nobody's got a firm grasp on what's going on. I think that's what's making it a little bit more anxious of a move."

Political and Fiscal Pressures

The yen has faced sustained pressure since Sanae Takaichi became Japan's prime minister in October, declining more than 4% on fiscal concerns. The currency has been hovering near levels that have historically prompted verbal warnings and intervention fears from Japanese authorities.

A bond market rout earlier in the week highlighted investor concerns about Japan's fiscal position as Takaichi called a snap election for February and promised tax cuts. This development sent Japanese government bond yields to record highs, though they have since recovered somewhat, leaving investors remain cautious.

Dollar Weakness and Global Market Dynamics

Elsewhere in currency markets, the dollar was positioned for its steepest weekly decline since June as geopolitical tensions continued to unsettle investors. The dollar index, which measures the U.S. currency against six major currencies, fell to 97.571 and was headed for a more than 1% weekly decline.

U.S. President Donald Trump's recent diplomatic developments contributed to market sentiment. On Wednesday, Trump announced he had secured U.S. access to Greenland in a deal with NATO, while backing off tariff threats against Europe and ruling out taking the autonomous territory of Denmark by force.

The dollar's weakness reflected broader investor anxiety in currency markets, as U.S. assets faced pressure amid intensifying geopolitical tensions. This revived discussions of the 'Sell America' trade that emerged following Trump's Liberation Day levies in April.

European Market Developments

The euro gained 0.5% to reach $1.181, positioning for a more than 1% weekly gain. In France, the government survived two no-confidence votes on Friday, with more expected after Prime Minister Sebastien Lecornu invoked constitutional provisions to force the expenditure portion of the 2026 budget bill through parliament.

Sterling remained stable at $1.362 despite UK retail sales data showing an unexpected rise in December, which had minimal impact on the pound's performance.

The Japanese Yen held onto overnight gains on Thursday but remained pinned near 18-month lows as traders stayed wary of intervention risks ahead of Japan's upcoming election. The currency's performance reflects growing concerns about fiscal stimulus measures and political uncertainty that could further constrain the yen's recovery prospects.

Currency Performance and Official Response

The yen traded at 158.554 per dollar in early Asian hours after strengthening 0.4% in the previous session. This modest recovery followed another verbal warning from Japanese Finance Minister Satsuki Katayama, as authorities attempt to stem the currency's decline through official intervention threats.

Despite the recent stabilization, the currency remained uncomfortably close to the 18-month low of 159.45 touched on Wednesday, highlighting the persistent downward pressure on the yen.

Political Developments Drive Market Concerns

Prime Minister Sanae Takaichi's plans to dissolve parliament's lower house next week and call a snap parliamentary election have intensified market volatility. The prospect of early elections has triggered significant selloffs in both the yen and Japanese government bonds as speculation about fiscal policy changes continues to mount.

Investors have grown increasingly concerned about Takaichi's spending plans since she assumed office in October. The political uncertainty surrounding the upcoming election has complicated the rate path for the Bank of Japan while dragging the yen into what markets consider the intervention zone.

Market Outlook and Strategic Considerations

OCBC FX strategists noted that while verbal warnings have helped cap yen weakness temporarily, investors are likely to test authorities' willingness to back their words with concrete action. The analysts emphasized that achieving a more meaningful yen rally would require both a hawkish Bank of Japan stance and greater clarity on Japan's fiscal and political outlook.

The current situation presents multiple challenges for Japanese monetary authorities, as they balance intervention considerations against broader economic and political developments that continue to weigh on currency sentiment.

Global Currency Market Context

The US dollar maintained its position at 99.129 against a basket of currencies, near the one-month high reached on Wednesday, though the index remained flat for the week. Other major currencies showed mixed performance, with the euro easing to $1.1636 and sterling trading at $1.3636.

Recent US economic data, including stronger-than-expected retail sales and rising producer prices in November, have reinforced expectations for the Federal Reserve to maintain current policy settings in January, providing continued support for dollar strength against major trading partners including the yen.