The dollar is feeling the heat again as investors double down on the expectation that the Fed will kick off its rate-cutting cycle with a bold 50bps move on Wednesday. What’s more, the ripple effect is sweeping through Asia, where currencies are basking in the glow of a softer dollar, with the yen leading the charge as the real star of the show. U.S. rates continue to slide, yet equity markets are stubbornly holding onto gains, reinforcing the soft-landing narrative and setting up what looks like a bearish outlook for the dollar. But the yen is stealing the FX spotlight.

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When it comes to USD/JPY, the story is as clear as day. The question is no longer if the yen will strengthen, but how far it’ll go if the Fed sticks to its aggressive rate-cut playbook. Sure, the data will need to take a nosedive to justify the bond market’s growing recessionary lean, but with the BoJ tightening while the Fed is on the brink of an easing frenzy, the yen is gearing up for a major rally. We’re just at the beginning of a yen supercycle, and this divergence between BoJ hawkishness and dovishness elsewhere makes it a get-on-board trade.

As we kick off a pivotal week for the Fed, the U.S. dollar continues to lose steam, pushing USD/JPY below the 140 mark for the first time since last July. Over the weekend, there’s been little pushback against market chatter of a larger Fed cut—everyone's got their own spin on why a jumbo cut makes sense.

But as we’ve pointed out before, all roads seem to lead to the same dovish conclusion: Why wouldn’t they cut now? Imagine a central banker waking up, seeing core inflation right on target and a jobless rate hovering around 4.2%. It’s pretty clear—they’re not going to want rates sitting 200 basis points above neutral. If anything, they’d be thinking, “Maybe we’re the ones behind the curve!”

It’s one of those lightbulb moments where the Fed realizes that inflation is under control, and the labor market’s softening just enough to let them ease up on the monetary brakes. So the real question becomes: do they start with a light cut, or go big and move toward neutral—or even lower? In this setup, it’s hard to see the dollar making any sustained comeback in the near term. FX traders are selling every little bounce in USD/JPY, and shorting the pair remains the best bet.

Meanwhile, the BoJ meeting will grab more headlines once the Fed’s out of the way, even though it’s likely to be a holding operation. After two rate hikes, the BoJ is expected to keep rates steady while assessing the impact of their previous moves. However, hawkish guidance from the BoJ, signalling that more hikes are on the table if Japan’s economy stays on track, could deliver a double boost for the yen this week.

As for the euro, it’s being brake checked by the economic woes in both China and Germany—two of the world’s biggest economic engines sputtering simultaneously. Still, with the EU: US two-year swap differential at its narrowest level of the year, around 87ps, the euro has room to gain, assuming equities hold up. But that’s the big “if.” But if that holds, EUR/USD could benefit to 1.1200 this week.

In short, the stars are aligning for a bearish dollar and a bullish yen. The BoJ is tightening while the Fed prepares to ease aggressively, setting the yen up for a stellar rally. The dollar’s downtrend seems locked in unless some unforeseen major data surprises knock this well-oiled narrative off course.

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