The Japanese yen has continued to decline against the US dollar for the third consecutive day, with the USD/JPY pair climbing to its highest level in about a week, stabilizing in the 147.70-147.75 range during Tuesday’s Asian session. This decline comes amid uncertainty surrounding the timing of the Bank of Japan’s next interest rate hike, coupled with the positive performance of Asian markets, which reduces the yen’s appeal as a safe haven. However, several factors may limit sellers’ ability to push the yen further down.
Investors currently believe that the Bank of Japan will continue its gradual path toward policy normalization, while expectations point to the US Federal Reserve cutting interest rates in September. This policy divergence between the two central banks serves as a buffer against sharper yen losses, especially since the yen is a low yielding currency. Additionally, concerns over the Federal Reserve’s independence could restrain the US dollar’s recovery and cap further gains in the USD/JPY pair, as traders prefer to remain cautious ahead of key US economic data scheduled later this week.
Despite supportive fundamentals, investor appetite for the yen remains limited. Asian markets recorded moderate gains at the start of the session, boosted by the rise of China’s CSI 300 index, which contributed to the yen’s continued weak performance against the dollar. On the domestic front, Japanese capital expenditure figures released on Monday showed an improvement in business investment during the second quarter, strengthening expectations for labor market support and demand driven inflation factors that could enhance the likelihood of a Bank of Japan rate hike.
Meanwhile, traders are pricing in roughly a 90% chance that the Federal Reserve will cut interest rates by 25 basis points in September, with additional cuts expected before year end. These expectations, alongside political controversy surrounding the Fed, keep the dollar under pressure. US Treasury Secretary Scott Bessent defended President Donald Trump’s decision to dismiss Fed Board member Lisa Cook, citing allegations of real estate fraud. Cook, however, refused to resign and filed a lawsuit, intensifying tensions within the Board and raising questions about its independence particularly since her departure could give Trump a majority on the Fed Board for the first time in decades. Trump has also continued his criticism of Fed Chair Jerome Powell, claiming he has not done enough to lower rates, further fueling concerns about potential political interference in US monetary policy.
This week, markets are closely watching a series of key US economic data releases that could influence dollar movements, starting with the ISM Manufacturing PMI due today, followed by JOLTS job openings on Wednesday, then the ADP private sector employment report and ISM Services PMI on Thursday, and finally Friday’s Nonfarm Payrolls (NFP) report. Collectively, these indicators will be crucial in shaping market expectations regarding the Fed’s monetary policy outlook in the coming period.
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