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USD/JPY strengthens above 154.00 on Fed’s hawkish tone

  • USD/JPY edges higher to around 154.20 in Tuesday’s early Asian session. 
  • Traders dialed back bets for further Fed rate cuts, boosting the US Dollar. 
  • The US  government shutdown is poised to become the longest in US history this week. 

The USD/JPY pair gathers strength to near 154.20 during the early Asian session on Tuesday. The US Dollar (USD) edges higher against the Japanese Yen (JPY) on the likelihood that the US Federal Reserve (Fed) might hold its interest rate in December. The Fed’s Bowman is set to speak later in the day. 

The Fed decided to cut its interest rates by 25 basis points (bps) last week, as widely expected. Nonetheless, Chair Jerome Powell signaled that it may be the last cut this year, emphasizing the risks of making further reductions without a more solid picture of the economy. Fed’s hawkish tone could provide some support to the Greenback against the JPY. Traders are now pricing in a nearly 70% possibility of a 25 bps cut in December, down from about 94% odds a week ago, according to the CME FedWatch tool. 

On the other hand, the ongoing US federal shutdown might cap the upside for the USD. The US government shutdown has entered its sixth week and is poised to become the longest in US history, with Republican and Democratic lawmakers in Congress no closer to ending their budget standoff. Meanwhile, federal workers across the country are going unpaid, adding to the uncertainty surrounding the economic picture. 

On the JPY’s front, uncertainty surrounding the timing of the next rate hike by the Bank of Japan (BoJ) could weigh on the JPY. Even though BoJ Governor Kazuo Ueda last week signaled that a rate hike was possible as soon as December, markets remained underwhelmed by the central bank's gradual approach. Traders expect Japan's new Prime Minister Sanae Takaichi to pursue aggressive fiscal spending plans and resist policy tightening. 

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.

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Lallalit Srijandorn

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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