- The Japanese yen's losses widened to over 161.90 against the US dollar, falling to its lowest level in 38 years due to the glaring interest rate differentials between Japan and the US.
- The Bank of Japan's lack of urgency in normalizing monetary conditions has also weighed on the currency, despite growing speculation that the BOJ could raise rates at its next policy meeting in late July.
- As is well known, a weak yen pushes up import costs, adding to inflationary pressures and hurting household consumption.
Meanwhile, Japanese Finance Minister Shunichi Suzuki stressed on Tuesday that the government remains vigilant on currency movements, noting that foreign exchange levels reflect a complex mix of factors. On the economic data front, the second revision showed that the Japanese economy contracted at an annual rate of 2.9% in the January-March quarter, a sharper decline than the previous reading of 1.8% as the revision to public works spending was much weaker.
USD/JPY Technical Analysis and Expectations Today
According to forex trading, USD/JPY rose to the 161.95 resistance level, the lowest level for the yen in 38 years. The pair extended its gains amid ongoing doubts about the BOJ's ambition to normalize monetary policy and the unexpected rise in US yields. There has been no respite from the yen's decline over the past month, but there has been a noticeable absence of verbal warnings from Japanese officials during this latest leg down.
For his part, Japanese Finance Minister Shunichi Suzuki gave the usual comment that the government continues to monitor the market closely, but there was no explicit warning of intervention. While it’s possible that Suzuki may not want to take any action until the newly appointed vice finance minister for international affairs, who is in charge of exchange rate policy, takes office on July 31, it could also be an indication that the level of tolerance for the exchange rate could be an indicator that the exchange rate may not be doing well. Intervention in forex market recommendations has been on the rise.
But to some relief for the yen, the currency traded slightly stronger against other major currencies, with weakness against the dollar mostly offset by the greenback’s strength. Although investors have recently become more confident that the Federal Reserve will be able to cut U.S. interest rates twice this year, the dollar has been on a shallow upward trend since early June, with other central banks leading the race to cut rates.
In recent days, the U.S. dollar has been supported by rising Treasury yields, helped by improved odds of Donald Trump winning the November presidential election after Biden’s poor performance in last week’s televised debate. A Trump presidency is seen as a tax cut, which would likely add to the already high US national debt.
Also, the reluctance of Federal Reserve officials to ease their hawkish stance has helped lift the dollar. Friday’s drop in core personal consumption expenditures inflation and yesterday’s weaker-than-expected ISM manufacturing PMI were the latest evidence that inflationary pressures are easing, and the economy is slowing somewhat. Elsewhere, Federal Reserve Chair Jerome Powell is scheduled to participate in a panel discussion with European Central Bank President Christine Lagarde at the ECB’s annual forum in Sintra, Portugal, at 13:30 GMT. Decisively, any suggestion from Powell that a September rate cut could be on the table could send the dollar lower.
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