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Yen weakness might not last despite Fed’s hawkish turn

The Japanese currency continues to slide as traders anticipate interest-rate movement in the US, but even the Fed's hawkish tilt does not guarantee that this direction of travel will be sustained.

Photo: iStock

This week, the yen touched a four-year low of just above 115 against the dollar. The current wave of JPY weakness, which started in late September, has been driven by higher US treasury yields as well as by the broad-based strength of the dollar due to inflation concerns and strong growth momentum.

“Expectations for Federal Open Market Committee policy normalization have not only lifted the 10‑year Treasury yield but have also widened the spread between US and Japan 10‑year swaps – which is supportive for USD/JPY,” explains Kim Mundy, currency strategist at Commonwealth Bank of Australia (CBA).

The last intervention to sell USD and buy JPY was probably … amid the Asian financial crisis
Joey Chew, HSBC

The Bank of Japan’s (BoJ) ultra-accommodative stance has helped to force the yen downwards and the difference in policy between the central banks of Japan and US will become even more pronounced if, as is expected, the Federal Reserve starts hiking interest rates in early 2022 while the BoJ maintains its -0.1% short-term rate.

According to Adam Button, chief currency analyst at ForexLive, the market is sending a strong signal that inflation is here.

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