Asian currencies strengthened on Tuesday as investors scaled back expectations for further Federal Reserve rate hikes, while Japanese stocks held near multi-month highs despite disappointing domestic growth data.
The Nikkei 225 Index was trading around 68,935 points, its highest level since July 10 and up about 14% from its July 29 low. Japan’s latest GDP figures missed expectations: the economy expanded by 1.1% in the second quarter, below the 2% forecast and down from 2.1% in the first quarter. A separate reported measure pointed to an annualized 0.4% contraction in the fourth quarter, worse than the 0.2% decline economists had expected.
The soft data put pressure on the Bank of Japan, which is balancing elevated inflation and a weak yen. The BoJ has kept interest rates at 1%, while U.S. rates remain between 3.50% and 3.75%, fueling carry trade demand for the dollar. USD/JPY pulled back to 159 from the prior high of 159.6 as traders weighed possible intervention by Japanese authorities.
At the same time, fading Fed rate hike bets softened the dollar against a basket of Asian currencies. Traders cited recent Federal Reserve commentary and softer economic data as reasons for reducing tightening expectations. A less hawkish Fed outlook reduces the appeal of the dollar and supports capital flows into regional assets.
Japanese equities have also benefited from AI-related strength. SoftBank shares are up about 30% this year on AI bets including OpenAI and Intel, while Kioxia Holdings has jumped 418% in 2026, with Tokyo Electron and Advantest among top gainers. From a technical perspective, the Nikkei has moved above a descending channel, is supported by the 50-day EMA, and has an RSI near 60, with bulls targeting the year-to-date high of 72,870.
