USD/JPY Eyeing Deeper Retracement as Dollar Index Rises
As of yesterday, the US dollar index was up eight percent since the beginning of the year. The 10-year treasury yield has been rising since the beginning of the year. In July, the 10-year treasury yield looked like it was rolling over. It’s also been in a bullish candle for the month of August. However, there’s a lot of room for the dollar to strengthen further. It’s still a bit early to call the end of the dollar’s run, but it’s probably worth betting against it.
The US economy is still growing. The US economy is still trying to slow down inflation, but it’s tough to do. So, the Fed has been aggressively raising interest rates. This has been good for the dollar. However, it has also dampened risk sentiment. In addition, rising interest rates can drive mortgage rates higher, making bonds more volatile. This has also contributed to a selloff in stock markets.
It’s possible that the Federal Reserve will cut its rate hike by a quarter point in December, which could limit gains on the USD/JPY pair. It’s also possible that the Federal Reserve will continue to increase interest rates, making the Dollar stronger. Regardless of which path it takes, the path of least resistance for global yields remains higher. However, the Fed has been printing tens of billions of dollars to spur growth. The Fed’s efforts to bring inflation down are likely to continue. This has helped the Dollar extend its rally.
On Tuesday, the FOMC had a meeting and discussed its plans for the economy. The US Consumer Price Index was lower than expected, which bolstered the idea that the Fed might be moving more slowly. Federal Reserve policymaker Jerome Powell is likely to make a statement on Wednesday. If he does, it may give the Euro sellers a break. However, the markets have priced in a less aggressive Fed hike in December. Whether or not he does, it will be difficult to stop the Dollar’s momentum.
As of yesterday, the US dollar/Japanese yen pair was trading near its strongest level in two months. It also stayed above its 10-year treasury yield level, which has been rising since the beginning of the year. The BoJ has been stubborn in keeping its benchmark rate at a record low, but the Fed and other central banks have embarked on rate hike trajectories. This has also contributed to the JPY’s decline. The US economy is growing, but inflation is still above the Fed’s 2% target.
The Japanese yen has been whipping boy of the rising rate environment. Despite the MoF’s intervention, the yen hasn’t changed its trend of weakening. However, the risk of further decline could mean that global yields go even higher. This could be good news for cryptos.