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USD/JPY jumps to near 148.30 as Fed Powell’s caution on rate cuts boosts US Dollar

  • USD/JPY climbs to near 148.30 as Fed’s Powell didn’t endorse aggressive dovish stance.
  • Fed’s Powell warns of slowing job demand and upside inflation risks.
  • Japan’s Jibun Bank Manufacturing PMI declines at a faster pace in September.

The USD/JPY pair trades 0.45% higher to near 148.30 during the European trading session on Wednesday. The pair gains sharply as the US Dollar (USD) outperforms a majority of its peers, following comments from Federal Reserve (Fed) Chair Jerome Powell that the central bank needs to be cautious on further interest rate cuts.

During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rises almost 0.4% to near 97.60. The USD Index resumes its upside journey after a two-day corrective move.

On Tuesday, Fed’s Powell stated at the Greater Providence Chamber of Commerce that the upside inflation risks and labor market concerns have posed a challenging situation for the central bank, which is prompting officials to exercise caution on further monetary policy easing. Powell also stated that the current interest rate range is “well positioned to respond to potential economic developments”.

Fed Powell’s comments were similar to statements from Federal Open Market Committee (FOMC) members St. Louis Fed President Alberto Musalem, Atlanta Fed President Raphael Bostic, and Cleveland Fed President Beth Hammack who stated on Monday that the central bank needs to cautious over unwinding monetary policy restrictiveness further, citing persistent inflation risks.

Going forward, investors will focus on the US Durable Goods Orders and Personal Consumption Expenditure Price Index (PCE) data for August, which will be released on Thursday and Friday, respectively.

In Japan, the manufacturing business activity has declined again in September. Preliminary Jibun Bank Manufacturing PMI data came in lower at 48.4 against 49.7 in August. Economists had anticipated the Manufacturing PMI to have expanded this month to 50.2. The Services PMI grew at a moderate pace to 53.0 from the prior reading of 53.1.

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.

Author

Sagar Dua

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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