- USD/JPY sees more downside below 142.00 due to significant weakness in the US Dollar.
- US President Trump aims to reduce dependency on China for vital minerals.
- Investors await Fed Powell’s speech and Japan’s National CPI data for March.
The USD/JPY pair struggles to hold the key support of 142.00 during North American trading hours on Wednesday, the lowest level seen in over four months. The pair faces selling pressure as the US Dollar (USD) has been hit hard by the intensifying trade war between the United States (US) and China.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls back to near 99.50 after a short-lived recovery move to near 100.00 on Tuesday.
The tariff war between the US and China has escalated further as President Donald Trump vows to reduce dependency on China for critical minerals, which have applications in various industries, including defense and technology. The tussle between Beijing and Washington started when the former retaliated against the imposition of reciprocal tariffs by Trump, which have now increased to 125%.
Meanwhile, growing expectations that the Federal Reserve (Fed) will cut interest rates aggressively this year have also weighed on the US Dollar. For fresh cues on the interest rate outlook, investors await Fed Chair Jerome Powell’s speech, which is scheduled for 17:30 GMT.
On the Tokyo front, investors await the National Consumer Price Index (CPI) data for March, which will be released on Friday. The inflation data will influence market expectations about whether the Bank of Japan (BoJ) will cut interest rates in the May policy meeting. Economists expect the Japan National CPI ex. Fresh Food to have risen at a faster pace of 3.2%, against 3% increase seen in February.
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.
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