USD/JPY jumps to near 145.40 as US trade jitters resurface
- USD/JPY rises strongly to near 145.45 as the US Dollar strengthens amid US trade jitters.
- US President Trump prepares to announce tariff rates for nations that have not made trade deal with Washington.
- Investors doubt whether the BoJ will raise interest rates again this year.
The USD/JPY pair gains sharply to near 145.45 during the European trading session on Monday, the highest level seen in a week. The pair strengthens as the US Dollar (USD) trades firmly, with investors awaiting the name of likely countries that will receive letters from United States (US) President Donald Trump, specifying reciprocal tariffs.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, revisits the weekly high around 97.45.
Over the weekend, US President Trump said that he will release letters outlining import duty rates for 12 countries on Monday in the countdown to the tariff deadline on July 9. So far, the US has announced trade agreements with the United Kingdom (UK), and Vietnam and has signed a limited pact with China.
Market participants worry that the imposition of reciprocal tariffs by the US on one of its leading trading partners will disorder the global trade. Such a scenario will increase demand for safe-haven assets, such as the Japanese Yen (JPY).
On the Tokyo front, investors seek fresh cues about whether the Bank of Japan (BoJ) will raise interest rates again this year. Last week, BoJ board member Hajime Takata highlighted the need of policy accommodation to weather the impact of tariffs by the US.
“My view is that the BoJ needs to support economic activity for the time being by maintaining its current accommodative monetary policy stance, Takata said.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.