Yen moves lower amid negative pressures

The Japanese yen fell against a basket of major and secondary currencies in Asian trading on Wednesday, extending its losses against the US dollar for a fourth consecutive day and moving toward breaking below its two-week low, amid negative pressures, particularly those related to interest rate differentials between Japan and the United States.

Following last week’s Bank of Japan meeting, which delivered a less hawkish tone than markets had expected, expectations for a Japanese interest rate hike in October declined. Attention is now turning to a series of upcoming economic data releases that could provide crucial signals on the monetary policy outlook and the timing of the Japanese central bank’s next move.

The Price

• The Japanese yen exchange rate today: The dollar rose 0.2% against the yen to ¥157.68, from the day’s opening level of ¥157.38, after recording a low of ¥157.32.

• The yen ended Tuesday down less than 0.1% against the dollar, its third consecutive daily loss, trading near a two-week low of ¥158.06.

US dollar

The US Dollar Index rose 0.2% on Wednesday, extending gains for a third consecutive session and hitting a two-week high of 100.73 points, reflecting continued strength in the US currency against a basket of global currencies.

The dollar’s advance has been supported by demand for the currency as the most attractive investment in the foreign exchange market, particularly amid the Federal Reserve’s hawkish stance, which supports the prospect of an additional US interest rate hike this year.

St. Louis Federal Reserve President Alberto Musalem and Chicago Federal Reserve President Austan Goolsbee both pointed to the need for further interest rate hikes to curb inflation driven by strong demand and higher energy prices.

According to the CME FedWatch Tool, the probability of the Federal Reserve leaving interest rates unchanged at its October meeting currently stands at 45%, while the probability of a 25-basis-point rate hike stands at 55%.

Japanese interest rates

• The outcome of last week’s Bank of Japan meeting was less hawkish than markets had expected, particularly after the decision to raise Japanese interest rates for the second time this year failed to receive unanimous support.

• Following the meeting, market pricing for the probability of a 25-basis-point interest rate hike by the Bank of Japan in October fell below 25%.

• Investors are awaiting further data on inflation, unemployment and wages in Japan to reassess those expectations.

Interest rate differentials

The interest rate differential between Japan and the United States currently stands at 275 basis points in favor of US rates, supporting the US dollar against the Japanese yen. Based on the expectations outlined above, the gap is expected to widen to 300 basis points in October.

Japanese authorities

Reports in the Nikkei newspaper said Japanese officials had conducted “rate checks.” The process involves authorities asking banks for currency quotes to assess market conditions, a step traders view as a potential precursor to intervention in the foreign exchange market.