USD/JPY surges to 11-month high around 148.90 on market caution, upbeat US Treasury yields

USD/JPY trades near 148.90 close to an 11-month high during the Asian session on Tuesday. The US Dollar (USD) continues to strengthen, partly due to cautious market sentiment and higher US Treasury yields.

The US Dollar Index (DXY) trades higher above 106.00, marking its highest level since November. This strength in the US Dollar is supported by the upbeat US Treasury yields. The yield on the 10-year US bond note, which has risen to 4.56% by the press time, is a level not seen since October 2007.

The expectation of high-interest rates persisting for an extended period is driven by the resilience of the US economy. Moreover, the US Federal Reserve (Fed) signaled further interest rate hikes, if necessary, reinforcing the strengthening of the buck.

Additionally, there are concerns about the potential consequences of a federal government shutdown, as both US President Joe Biden and a senior adviser have warned about the widespread difficulties it could cause, including the loss of food benefits for nearly 7 million low-income women and children.

While there was a prior agreement between President Biden and House Speaker Kevin McCarthy on government spending levels, the Republican-controlled House of Representatives may seek to pass significant budget cuts, which would require approval by the Democratic-controlled Senate.

These proposed cuts would require approval by the Democratic-controlled Senate, which is expected to reject them. If both houses fail to reach an agreement on government spending, it could lead to a partial government shutdown by the following Sunday.

Investors will likely watch key data releases later in the week, including US Consumer Confidence, Durable Goods Orders, Initial Jobless Claims, and the Core Personal Consumption Expenditures (PCE) Price Index, which is the Federal Reserve's preferred measure of inflation.

These datasets will provide important insights into inflationary pressures in the US economy and could influence trading decisions involving the US Dollar.

On the other side, the Japanese Yen (JPY) faces downward pressure after the Bank of Japan (BoJ) made no adjustment to its ultra-low monetary policy on Friday. BoJ has chosen to continue supporting the economy until inflation sustainably reaches its 2% target. This decision suggests that the central bank is in no hurry to phase out its massive stimulus program.

On Tuesday, Japanese Finance Minister Shunichi Suzuki commented on Japan's economic situation, emphasizing that the country is at a critical juncture where it needs to decide between stimulating consumption or promoting wage growth. Suzuki also noted that it is challenging to predict whether fiscal spending alone would lead to an increase in prices.

Moreover, Japan's newly appointed Economy Minister Yoshitaka Shindo has stated that it is crucial for currencies to exhibit stability in their movements, reflecting the underlying economic fundamentals.

On Monday, BoJ Governor Ueda highlighted the importance of taking more time to assess data before considering raising interest rates. Additionally, Deputy Governor Shinichi Uchida has emphasized the need for the central bank to continue monetary easing patiently and closely monitor currency market movements.

These dovish comments could undermine the Yen and may contribute to the support for the USD/JPY pair.