Politics takes center stage in currency markets

USD – Ongoing pressure from US politics

Recent weeks have clearly shown that President Trump’s domestic, foreign, and trade policy actions continue to weigh on the US dollar. Several of his tariff measures were struck down by the Supreme Court, creating frustration within the administration and adding fresh uncertainty. The independence of the Federal Reserve may also face scrutiny under the designated Fed Chair Kevin Warsh, who is seen as politically aligned with Trump. At the same time, the risk of military tensions with Iran adds another layer of geopolitical concern. In addition, shifting relative growth dynamics and a narrowing US interest rate advantage are likely to favor the euro. Overall, we see persistent headwinds for the USD and expect further depreciation against the EUR.

Yen – Weak despite Takaichi’s decisive win

Despite Prime Minister Takaichi’s landslide election victory, the yen remains under pressure. With her coalition securing a three-quarters majority and the LDP holding two-thirds of parliamentary seats, attention now turns to whether promised stimulus measures and tax cuts — including a potential suspension of VAT on food — will be implemented. BoJ Governor Ueda reiterated that rate hikes would depend on supportive economic data. Given the current political backdrop, we expect the BoJ to keep policy rates unchanged for now. As a result, EUR/JPY is likely to move sideways.

CHF – Strength amid rising uncertainty

Amid persistent trade and geopolitical uncertainty — much of it originating from the US — defensive currencies like the Swiss franc have benefited. Switzerland’s solid structural fundamentals, including economic resilience and strong fiscal and external positions, reinforce its safe-haven status. However, we anticipate a modest depreciation of the CHF in 2026, supported by stronger eurozone growth momentum, unless equity markets correct sharply or geopolitical risks intensify again. We view the franc’s current strength as temporary. With EUR/CHF near 0.90, the risk of Swiss National Bank intervention cannot be ruled out. Further CHF appreciation would be unwelcome given inflation remains extremely low at just 0.1% year-on-year, as it would deepen imported deflationary pressures.

Sources: Erste Bank