The U.S. dollar reached a three-month high against the yen on Tuesday, supported by Japan’s political instability and a series of upcoming economic events, including next week’s U.S. election. While the dollar showed little movement against most other major currencies, market participants are closely watching for new economic data and political developments to determine future trends.

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Political Upheaval Weakens Yen

The yen has come under pressure following Japan’s ruling coalition losing its parliamentary majority in recent elections, creating uncertainty around both political direction and monetary policy. The Bank of Japan (BOJ) is expected to announce its monetary policy decision on Thursday, with analysts anticipating no change in interest rates.

The dollar rose 0.1% on the day to 153.365 yen, continuing a trend that could result in the dollar’s largest monthly gain in over two years.

U.S. Data Boosts Dollar Outlook

Recent U.S. data highlights a mixed economic picture. Job openings hit a 3.5-year low in September, signaling a cooling labor market, while October’s consumer confidence climbed to a nine-month high, reflecting improved perceptions of job availability.

Helen Given, associate director of trading at Monex USA, noted the labor market’s gradual slowdown but expects limited downside for the dollar given the upcoming election and Federal Reserve meeting.

Market expectations of a Republican victory, with Donald Trump leading over Democratic rival Kamala Harris, have also contributed to the dollar’s strength, along with rising Treasury yields. The dollar index has gained 3.6% in October, on track for its best monthly performance since April 2022.

Key Economic Data Ahead

This week’s economic reports, including the Fed’s preferred inflation measure—the core personal consumption expenditures (PCE) index—and several jobs reports, will be closely monitored for signs of policy direction. However, Citi’s head of G10 FX strategy, Dan Tobon, cautions that the dollar may experience choppy trading until after the election.

Sterling Firms Ahead of U.K. Budget

Sterling edged up 0.2% to 1.2997 as investors await the Labour government’s first budget. Finance Minister Rachel Reeves and Prime Minister Keir Starmer are emphasizing the need for tough fiscal measures to manage the public finances while maintaining market confidence following the 2022 bond market crisis.

The Office for Budget Responsibility’s forecasts will be critical in shaping investor sentiment toward the government’s spending and tax plans.

Yuan Steady Despite Debt News

The Chinese yuan held steady offshore at 7.151 per dollar, with little reaction to reports that Beijing is considering issuing over $1.4 trillion in new debt to support the economy. The Standing Committee of the National People’s Congress is expected to approve the fiscal package, which includes 6 trillion yuan from special sovereign bonds, during meetings scheduled from November 4-8.

With political and economic uncertainties mounting globally, traders are bracing for volatile currency markets ahead of key policy decisions and election outcomes.