This is what caused Friday's sudden spike in the Japanese yen

By Joseph Adinolfi

Talk of Fed 'rate checks' played a role, one strategist says

The yen strengthened against the dollar on Friday afternoon.

Friday was a quiet day in markets for the most part, but there was one big move that raised eyebrows: Late in the New York morning, the U.S. dollar suddenly cratered against the Japanese yen.

The move quickly spilled over into other currency pairs, as the dollar was dragged lower against the euro (EURUSD), British pound (GBPUSD), Swiss franc (USDCHF) and other rivals. The weakness persisted all afternoon; in recent trade, the dollar was off 1.7% at 155.71 yen (USDJPY), its weakest level in about a month, FactSet data showed. Prior to this, the dollar had been trading at its strongest level against the yen in 18 months.

It capped off the dollar's worst week in eight months based on the performance of the ICE U.S. Dollar Index DXY, which tracks the dollar's value against a basket of rivals.

See: Why the dollar just had its worst week in 8 months despite Trump's pivot on tariffs

To some, the move bore the classic hallmarks of Bank of Japan intervention. Joseph Brusuelas, chief economist at RSM U.S., said in a post on X that the move looked like the Bank of Japan was intervening in the currency market to boost the yen.

Others said the move was driven by the Federal Reserve doing "rate checks" - that is, calling up large currency dealers and asking for quotes on the dollar-yen pair.

Brent Donnelly, president of Spectra Markets, said in commentary shared with clients and MarketWatch that word had gotten out that the Federal Reserve had called up major currency dealers and asked for dollar-yen rate checks. This is likely what caused the dollar to start selling off shortly after 11 a.m. Eastern time, Donnelly said.

"A lot of confusion as to what was going on, but it eventually became clear that the Fed did a rate check and this was public information that banks were allowed to share," he said.

As for what might happen next, there are a few ways to interpret the central bank's intentions here, Donnelly noted. It is likely, in Donnelly's view, that Japan's Ministry of Finance asked the U.S. Treasury Department to ask the Federal Reserve to do a rate check, and that the U.S. central bank obliged. Currency-market experts say central banks sometimes use rate checks as a tool to spark desired moves in exchange rates.

If that was indeed the case, there are a few different possibilities worth considering, according to Donnelly. The first is that the Ministry of Finance would like to stabilize the yen, but not intervene directly. The Japanese currency has been sliding over the past few months, even as Japanese bond yields have risen; government bond yields and currencies often move in the same direction. If Japanese officials decide not to act, Donnelly expects investors will soon see a large short squeeze in the currency pair. Then, the Ministry of Finance and Bank of Japan will need to intervene directly at around 159 yen or 160 yen to the dollar.

MarketWatch has reached out to the Bank of Japan, Federal Reserve and Treasury Department for comment.

A second scenario: This is just a taste of more intervention to come, and the Japanese Ministry of Finance will "drop the hammer" and attempt to push the yen even higher on Sunday evening.

A third scenario is that Japanese officials will save their firepower until Monday. The Bank of Japan on Friday decided to leave its policy interest rate unchanged on Friday, but signaled more rate hikes would likely follow.

"The last Japanese administration had a love for selling [dollars for yen] in [New York] time for some reason," Donnelly said in written commentary.

Yet another possibility to consider: The move could be the start of more coordinated action between the U.S. and Asian allies like Japan and South Korea. Treasury Secretary Scott Bessent ?recently said he discussed the Korean won's (USDKRW) weakness with a senior South Korean official.

"I am always a massive skeptic of stories like this because they pop up frequently and they are never true," Donnelly said. "This time, however, there is obviously some real-world decisions being made or the Fed wouldn't be taking this action. So, it's not ridiculous to believe that following Bessent's comments on [the won] last week, the U.S. and some Asian partners have agreed to stabilize or strengthen [the yen, the won, and the Taiwan dollar]."

-Joseph Adinolfi

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01-23-26 1829ET