Multiple pressures in markets: Yen to dollars set the tone for the collapse

Global markets are facing a perfect storm of economic uncertainty and macroeconomic pressures that have led to significant declines. Two risk factors dominate the current narrative: the potential U.S. government shutdown and increasing signals of possible intervention by the Japanese central bank in the currency market. Both elements converge to create a volatile scenario where the yen-to-dollar relationship becomes a key indicator of global risk sentiment.

The risk of a U.S. shutdown intensifies uncertainty

The partial shutdown of the U.S. federal government remains a looming threat with probabilities around 78%. Democrats have expressed their intention to oppose the new budget funding package, and if an agreement is not reached before critical dates, significant portions of the government apparatus would shut down.

When a shutdown risk emerges, markets experience predictable but devastating changes. Institutional uncertainty increases exponentially, investors’ appetite for risk assets collapses, and market participants tend to liquidate positions without deep reflection, causing cascading sales. This pattern has proven especially damaging for cryptocurrencies and high-growth stocks.

Yen intervention: the hidden mechanism behind the declines

Japan has historically kept its currency weak through expansive monetary policies. This yen weakness has allowed numerous investment funds to implement carry trade operations: borrowing in cheap yen and deploying that capital in equity markets and cryptocurrencies, where they expect higher returns.

However, when the yen begins to strengthen—as traders are anticipating with signals of possible coordinated intervention—these funds face immediate pressures. Reports indicate that the Federal Reserve Bank of New York has contacted banking institutions about yen behavior, a move that historically precedes official interventions. Simultaneously, Japan’s Prime Minister has warned of strong responses to “abnormal” movements in the currency market.

If intervention occurs, the cascade of events would be mechanical but devastating: the U.S. would sell dollars to buy yen, strengthening the Japanese currency and weakening the dollar. But before this formally happens, funds anticipate these moves and close speculative positions. The result is a massive sell-off of assets—from stocks to cryptocurrencies—as these funds seek to generate cash to repay yen loans. The pressure on the yen-to-dollar relationship creates a domino effect that propagates through global markets within hours.

Adding to this is the trade war driven by Trump, along with trade conflicts with Europe and Canada, which exacerbate the risk environment and generate additional uncertainty over international trade flows.

Extreme volatility: short-term economic catalysts

This time window accumulates multiple catalysts that will significantly amplify volatility across all market segments. Upcoming consumer confidence data, the Federal Reserve’s monetary policy decision accompanied by its press conference, quarterly results from tech giants like Microsoft, Meta, Tesla, and Apple, as well as PPI inflation indicators, form a dense calendar of disclosures that will force investors to constantly reevaluate their positions.

In this convergence of risks, the market remains hypersensitive to any news that could trigger further movements. Investors are closely monitoring both U.S. political stability and the evolution of the yen against the dollar, knowing that both variables are leading indicators of broader turbulence in risk assets.