USD/JPY claws back losses as US Dollar gains ground
- USD/JPY bounces back as the US Dollar attracts bids ahead of the flash US PMI data for July.
- The US Composite PMI is estimated to have expanded at a faster pace.
- US-Japan trade agreement revives hopes of further monetary policy tightening by the BoJ this year.
The USD/JPY pair recovers its early losses and flattens around 146.50 during the European trading session on Thursday. The pair bounces back as the US Dollar (USD) snaps four-day losing streak ahead of the flash United States (US) S&P Global Purchasing Managers’ Index (PMI) data for July, which will be published at 13:45 GMT.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounds to near 97.40 in European trading hours from an almost three-week low around 97.00 posted earlier in the day.
Economists expect the US Composite PMI to have grown at a faster pace, contributed by expansion in both manufacturing and the service sector activity.
The US Dollar faced a sharp selling pressure in past few trading sessions as demand for safe-haven assets diminished, following the announcement of a trade agreement between the US and Japan. Meanwhile, a report from Financial Times (FT) has also signaled that the US and the European Union (EU) are close to reaching a trade pact.
Meanwhile, the Japanese Yen (JPY) gives up some initial gains even as US-Japan trade agreement has improved market expectations that the Bank of Japan (BoJ) could raise interest rates again this year.
Going forward, major triggers for the pair will monetary policy announcements by the Federal Reserve (Fed) and BoJ, which are scheduled for next week.
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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