The dollar suddenly drops in response to Japanese intervention: a major realignment of the currency market

May 2025 marked a turning point in the global currency markets. In a move that surprised many observers, the dollar plummeted sharply against major currencies, triggering a widespread recalibration of exchange rate valuations. This was not just an ordinary fluctuation – it was a coordinated intervention reaffirming the authorities’ ability to influence market directions.

How Japan’s intervention triggered the sharp decline of the dollar

The USD/JPY pair was the epicenter of this seismic shift. The market saw a 2.7% drop during Asian trading hours – an amplitude clearly signaling an official coordinated action. Market analysts immediately attributed this to intervention by the Bank of Japan and the Ministry of Finance, a tactic that Japanese authorities have in their historical arsenal.

Why would Japan intervene? The yen was under constant pressure due to a marked divergence in monetary policy. While the Fed maintained a more restrictive stance with higher interest rates, the Bank of Japan continued an ultra-accommodative approach. This divergence artificially weakened the yen, increasing costs for an import-dependent country like Japan.

The sudden decline of the dollar was not isolated. The US dollar index (DXY), which measures the USD’s strength against a basket of six major currencies, plunged by 1.1%. This reflected broader dollar selling, not just yen appreciation.

Currency movements in the global market: yen rises, euro and franc benefit

When the dollar falls, other currencies gain ground. The euro and Swiss franc experienced decisive increases amid this retreat. EUR/USD broke through important technical resistance levels, while USD/CHF fell by 1.5%.

The European Central Bank maintained a more moderate hawkish stance, communicating a gradual, data-driven approach. This contrasted with market expectations of a more aggressive easing from the Federal Reserve, supporting euro appreciation. The Swiss franc, traditionally a safe haven during times of uncertainty, benefited even more. The Swiss National Bank remained vigilant on inflation and was open to using foreign exchange sales to support its currency.

Rebalancing was not random. Markets were positioned strongly for dollar dominance, and the yen was broadly positioned for weakness. The intervention caught the market off guard, creating conditions for a rapid reversal.

Fundamental forces behind the dollar’s decline

The dollar’s decline was not limited to a single intervention. Three interconnected factors acted in tandem:

Central bank policy divergence: The gap between the Fed, ECB, BoJ, and BNE narrowed significantly. Market expectations for a possible rate cut by the Fed weakened the dollar’s yield advantage, a traditional support for the currency.

Global risk sentiment: Improved investor appetite for non-American assets reduced demand for the dollar as a funding currency. During higher risk periods, the dollar is in demand; in more favorable conditions, investors shift to other instruments.

Weaker US economic data: Disappointing reports on the labor market and manufacturing sector fueled speculation about a more aggressive Fed rate cut. A weaker dollar is the consequence of a less restrictive Fed outlook.

Why volatility remains high after the dollar’s decline

A senior forex analyst at a global bank noted that “a single operation can provide a temporary reprieve, but the lasting impact depends on a change in fundamentals – either through a modification of BoJ policy or a clear slowdown in US economic data.”

This underscores a critical reality: the dollar is falling today, but its long-term trajectory remains uncertain. If the Bank of Japan raises rates in the future, if the Fed cuts aggressively, or if US economic data improve, market forces could reverse. Volatility will remain high as long as these scenarios remain unresolved.

The market will closely monitor statements from G7 finance ministers, US CPI data, and protocols from the European Central Bank and Federal Reserve minutes. Each announcement could rewrite the narrative about the dollar’s decline.

Lessons from history: currency interventions and their lasting effects

The current moment is not unprecedented. The Plaza Accord of 1985 recalibrated exchange rates broadly after years of a strong dollar. Japan repeatedly intervened in 1998, 2011, and 2022 with mixed results. Historical analysis shows a clear pattern: interventions are most effective when aligned with a turning point in fundamentals.

The environment in 2025 offers such an alignment. Expectations for a more relaxed Fed, combined with weaker economic data, have created conditions for the dollar’s decline to be supported by fundamentals – not just artificial market moves.

Future outlook: what traders should monitor

The bottom line is simple: the dollar is falling not because the market decides, but because fundamentals have changed. Now traders are preparing for a sustained period of dollar adjustment. Monitoring will be essential on multiple fronts:

• Market data from Japan will confirm or deny the effects of intervention
• Official statements from authorities will signal future intentions
• US economic reports will determine if the Fed acts
• Central bank communications will guide market expectations

Volatility in currency markets should be expected. In an era of high-frequency algorithmic trading, interventions and realignments can be abrupt and dramatic. Nonetheless, the 2025 episode reaffirms that central banks remain dominant players in global currency markets.

This recalibration marks a new phase in macro trading. Managing currency exposure and understanding monetary policy are more important than ever.