The U.S. dollar took another hit on Monday, weakening to its lowest levels in four months, as talk of a coordinated intervention to prop up the competing Japanese yen intensified.

A stronger Japanese currency could end up translating into trouble for U.S. stocks, as it did on Aug. 5, 2024, when a sharp unwinding of the yen carry trade was blamed for a selloff in global stocks.

The ICE U.S. Dollar Index DXY, a gauge of the U.S. currency against a basket of six rivals, was off 0.6% in Monday trading at roughly 97, and it fell to as low as 96.85 earlier in the day - its lowest level since last September. The index also finished Friday's session with its worst weekly performance since late May. Helping to dent the dollar's performance were reports that the New York Federal Reserve Bank had reached out to potential trading counterparties to inquire about market pricing for the dollar-yen currency exchange rate on Friday, signaling the possibility of an intervention to boost the value of the yen.

Meanwhile, the yen (USDJPY) strengthened against the the U.S. currency on Monday, to 153-154 to the dollar. Almost two weeks ago, the yen had been around the 159 level, one of its weakest levels in at least the past three decades.

The yen has largely weakened against the dollar for over a decade as a result of relatively lower interest rates in Japan compared with the U.S. - which enabled investors to take advantage of the Japanese currency's cheapness through carry trades. Such trades involve borrowing the yen to invest in higher-yielding U.S. assets, like stocks.

Japanese stimulus

The yen weakened again this month and late last year because of expectations that Japanese Prime Minister Sanae Takaichi is weighing more proactive spending to help the country's economy. Her plan sent Japan's 40-year bond yield BX:TMBMKJP-40Y toward a record north of 4% last week. The yen has modestly strengthened in recent days, however, as speculation about a coordinated U.S.-Japan intervention picked up. Jefferies is one of the big-name firms that is predicting the yen's rally could have more room to run.

"The market has been very dollar-bearish for a while, and the rhetoric around a yen intervention has really escalated," said Amarjit Sahota, a director at Klarity FX, a San Francisco advisory firm that helps clients manage foreign-exchange risks. A stronger Japanese currency "would mean that people are backing away from using cheap yen to buy U.S. equities," he said, adding that this "is overdue, to a degree."

Joseph Brusuelas, chief economist and principal at RSM US, said in a note that he thinks a U.S.-Japan yen intervention is "imminent." Separately, Kathy Jones, chief fixed-income strategist at the Schwab Center for Financial Research, said in a post on X that she believes an intervention "can only slow momentum" and that, in order to reverse the trend of a weakening yen, "the fundamentals need to change."

Separately, Michael Burry, who gained fame as an investor for anticipating the subprime mortgage crisis that led to the 2008 financial-market meltdown, said the yen is "long, long overdue for a trend reversal" and that there will be many consequences from this.

Continued dollar weakness?

The ICE dollar index remains just barely above where it was last September and July, when it was bogged down by tariff-driven uncertainties and signs of economic weakness that led to expectations for aggressive interest-rate cuts by the Federal Reserve.

A break below the September and July levels, to roughly 96, would suggest that there "could be a continuation of the dollar weakness that's been on hiatus since last summer," said Sahota at Klarity FX. For now, "it's a little premature to say the dollar is going to take a big nosedive" from here, he said. "We could still be in a choppy range as it has been since June or July, but things certainly feel heavy."

Market participants pointed to a range of factors that were hurting the dollar's appeal on Monday, including the potential for another U.S. government shutdown. In Sahota's view, the greenback was being weighed down by questions around the Fed's independence, President Donald Trump's pick to replace Fed Chair Jerome Powell, and uncertainty over the Supreme Court's expected decision on Trump's tariffs. Overseas, international investors are "upset about the U.S.'s approach to Greenland" and are keeping an eye on Japan.