Dollar Slips To Four Week Yen Low

In June, the US Dollar slipped from a value of 100 to the Yen down to a low of 94 before rallying to end the month at 98 Yen to the Dollar. The reason for this decline was the fear amongst investors that the Federal Reserve was about to pull the plug on its $85 billion per month asset purchasing programme. The recovery in the Dollar’s fortunes was due to reassurances from the Fed that the financial crutch would not be pulled from the US economy until the recovery was well established and unemployment had fallen to 6.5% from its current level of 7.6%. Even then, the Fed stressed, removal of support would be a gradual process rather than a “cold turkey” approach. Over the course of July, the Dollar strengthened to just above the 101 mark against the Japanese currency, but fell sharply from 100.4 down to 98.26 by the end of last week – the question is why.

The decline seems to be an indirect consequence of the earlier jitters since it is due in part to investors re-aligning their portfolios to correct for declining yields on US Treasury bonds affecting their long positions. The Dollar was also not helped by disappointing US home sales which declined in June by 1.2%, confounding experts who had been predicting an increase of 0.6%.

In Japan, the cost of living increased by 0.4% which could have been viewed as good news against the backdrop of Bank of Japan moves to increase inflation within the economy. However, the underlying reason for the rise seems to be higher energy costs rather than increased domestic demand. Much of Japan’s nuclear power generation capacity remains off-line following the 2011 tsunami meaning that the nation is heavily reliant on fossil fuel imports for electricity generation. These become increasingly expensive as the Yen falls, of course.