- The US Dollar appreciates on higher US yields, to test one-month highs, at 147.80.
- Investors pare back US Dollar shorts ahead of key US macroeconomic releases.
- Recent Japanese data has put an immediate BoJ rate hike into question.
The US Dollar is going through a strong comeback on Tuesday. The pair appreciates nearly 1% so far today, and has reached the highest level since August 1, right below 147.80, although it remains capped below that level so far.
A risk-averse market sentiment is underpinning demand for the Greenback, which is also drawing some support from the higher US Treasury yields as the US market opens after a long weekend with a string of key US macroeconomic figures.
The Calendar opens today with the US ISM manufacturing PMI release, which is expected to show some improvement in the sector’s activity, yet still at contraction levels. The Prices Paid and the Employment sub-indices could muddle the impact of the data with the Fed’s monetary policy meeting looming.
The US Dollar rallies ahead of key US data releases
Investors’ focus, however, will be on job numbers, namely Friday’s Nonfarm Payrolls report. The US Dollar is likely to be particularly sensitive to weak employment numbers. After last month’s shock, any further evidence of a deteriorating labour market would practically confirm a Fed cut in September and increase pressure on the USD.
In Japan, the focus will be on the August Tokyo CPI index, which will be analysed with special attention to assess the odds for the BoJ tightening in September, an option that is gaining ground after recent comments from Governor Ueda, warning about the inflationary trend in wages.
In Japan, the BoJ has reiterated its commitment to higher interest rates, but the easier inflation pressures seen last week and the downbeat retail consumption and factory activity cast doubt about the timing of the next rate hike, and put a lid on the Japanese Yen’s recovery.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential 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 directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
