USD/JPY slips below 145.00 amid US dollar weakness

VaselineAugust 27, 2024

0 2 minutes read

USD/JPY slips below 145.00 amid US dollar weakness

USD/JPY slips below 145.00 as the US dollar remains on the back foot.
Traders remain divided on the likely size of the Fed’s September rate cuts.
Investors are skeptical about how much inflation will rise in Japan this year.

USD/JPY is down near 144.70 in the European session on Tuesday. The asset fell as the US dollar (USD) remains on the back foot as market participants appear confident that the Federal Reserve (Fed) will begin cutting interest rates at its September meeting. The US Dollar Index (DXY), which tracks the greenback against six major currencies, underperformed below 101.00.

Investors’ risk appetite decreased as tensions between Iran and Israel in the Middle East escalated. S&P 500 futures sell gains in Asian trading hours. While broader market sentiment remains upbeat amid confidence that the Fed will pivot to policy normalization in September.

Although the Fed appears certain to cut interest rates in September, traders remain divided on the likely size of rate cuts, given that recession fears in the United States (US) have eased significantly. The CME FedWatch tool shows that the probability of a 50 basis point (bps) interest rate cut is 28.5%.

For fresh interest rate guidance, investors await the July core US personal consumption expenditure (PCE) price index data due on Friday. Annual core PCE is estimated to have grown at a faster pace of 2.7% from 2.6% in June, with the monthly numbers rising steadily by 0.2%. Signs that price pressures remain persistent would hurt expectations of further interest rate cuts.

Meanwhile, the Japanese yen (JPY) is outperforming the US dollar on the latter’s weakness, but is underperforming its peers. Signs of easing pressures on prices in Japan that remain sticky raised doubts about the scope of the Bank of Japan’s policy tightening. Japan’s corporate services price index, a key measure of producer inflation, fell 2.8 percent in July from estimates of 2.9 percent and June’s reading of 3 percent. However, BoJ Governor Kazuo Ueda said last week that further interest rate hikes were needed.

Frequently Asked Questions about the Japanese Yen

The Japanese Yen (JPY) is one of the most traded currencies in the world. Its value is largely determined by the performance of the Japanese economy, but more specifically by Bank of Japan policy, the difference between Japanese and US bond yields, or risk sentiment among traders, among other factors.

One of the Bank of Japan’s mandates is currency control, so its moves are key for the yen. The BoJ has intervened directly in currency markets on occasion, generally to depress the yen, although it refrains from doing so because of the political concerns of its main trading partners. The BoJ’s current ultra-loose monetary policy, based on massive stimulus to the economy, has caused the yen to depreciate against its major peers. This process has been exacerbated more recently by a widening policy divergence between the Bank of Japan and other major central banks, which have opted to raise interest rates sharply to fight decades-high levels of inflation.

The BoJ’s stance of sticking to ultra-loose monetary policy has led to increased policy divergence with other central banks, particularly the US Federal Reserve. This supports a widening of the spread between US and Japanese 10-year bonds, which favors the US dollar against the Japanese yen.

The Japanese yen is often seen as a safe investment. This means that during periods of market stress, investors are more likely to put their money into the Japanese currency due to its supposed reliability and stability. The troubled times are likely to strengthen the value of the yen against other currencies considered riskier to invest in.

VaselineAugust 27, 2024

0 2 minutes read

Frequently Asked Questions about the Japanese Yen

Vaseline

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