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What’s going on with the Dollar vs. Japanese yen (USD/JPY)?

What’s going on with the Dollar vs. Japanese yen (USD/JPY)?

The Japanese yen (JPY) has witnessed a persistent downward trend against the US dollar (USD) and other major currencies since last year, primarily attributable to a significant difference in monetary policies between Japan and global central banks.

On Wednesday, September 27, the yen witnessed another downturn as the USD/JPY pair rose further to 149.15, a level not seen since October 2022.

USD/JPY 1-year chart. Source: TradingView

The latest upswing took the pair closer to the key 150 level, where the Japanese authorities are seen as possibly intervening in the foreign exchange (Forex) market to prop up their battered currency. 

Why has USD advanced against JPY today?

The US dollar’s most recent leap against the JPY comes mainly due to more cautious market sentiment and higher US Treasury yields. Notably, the benchmark 10-year US government bond yields skyrocketed to 16-year highs this month as the US economy continues to show resilience despite elevated interest rates. 

10-year US Treasury yield at 16-year high. Source: CNBC

In addition, the Federal Reserve (Fed) said last week it may raise rates further in 2023 and plans to keep them high for a longer time in a bid to bring inflation to its 2% annual target. 

These factors pushed the US Dollar Index (DXY) – which gauges the relative value of the USD against a basket of the biggest global currencies – above the 106 mark, the highest since November. 

“The story of September has been the jump in Treasury yields and the spillovers into the currency market. The market has expected the economic data to deteriorate and it hasn’t.”

said Adam Button, chief currency analyst at ForexLive.

Factors driving the overall USD/JPY uptrend

In broad terms, the JPY has been on a downward trajectory for a while now. The reason for this is primarily the significant discrepancy in the Bank of Japan’s (BOJ) monetary policy compared to other global central banks.

Notably, while the Fed and other policymakers around the world have been hiking rates aggressively over the past year and a half to curb inflation, the BOJ has retained its ultra-dovish stance, pledging to keep supporting its economy through monetary stimulus until inflation sustainably hits the 2% target.

However, this stance has sent the JPY on a wild ride, with the currency hitting an 11-month low on September 26. On that day, Japan’s Finance Minister Shunichi Suzuki said the government was monitoring the yen “with a high sense of urgency,” hinting at a potential market intervention. 

Analysts’ comments

Weighing in on the latest USD/JPY movements, analysts at Japan’s MUFG Bank warned that more volatility and higher trading ranges are likely if the pair breaks through the 150 threshold. 

“We would need to see a break of the 150 level in order to spark greater market volatility that could be used to justify intervention. That implies we could see a sharp bounce above 150 initially but then a reversal as Japan intervenes to halt Yen weakness.”

– the analysts wrote.

The analysts explained the potential for an upside move is there, although it is unlikely that such a rally would be sustained for long, they added. 

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