USD/JPY extends recovery to near 144.00 ahead of US NFP data
- USD/JPY extends its recovery to near 144.00 as the US Dollar gains ground ahead of the US NFP data for May.
- Economists expect the US economy to have added 130K fresh workers in May.
- US President Trump expressed confidence of smooth trade negotiations with China.
The USD/JPY pair rises further to near 144.00 during European trading hours on Friday, following the previous day’s recovery move. The pair strengthens as the US Dollar (USD) extends recovery ahead of the United States (US) Nonfarm Payrolls (NFP) data for May, which will be published at 12:30 GMT.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rises to near 99.00 after recovering from the six-week low of 98.35 posted the previous day.
The US NFP report is expected to show that that the economy added 130K fresh workers, lower than 171K hired in April. The Unemployment Rate is seen as steady at 4.2%. Meanwhile, Average Hourly Earnings, a key measure of wage growth, is estimated to have grown by 0.3% on month, faster than the prior reading of 0.2%. Year-on-year wage growth measure is expected to have risen by 3.7%, slower than 3.8% in April.
Financial market participants will pay close attention to the US employment data as it will influence market expectations for the Federal Reserve’s (Fed) interest rate outlook.
On Thursday, the USD Index bounced back after the post from US President Donald Trump on Truth.Social indicated de-escalation in trade tensions between Washington and Beijing. “The call lasted approximately one and a half hours, and resulted in a very positive conclusion for both countries.” Trump wrote.
On the Tokyo front, the Japanese Yen (JPY) underperforms across the board as investors lack clarity on when the Bank of Japan (BoJ) will raise interest rates again. This week, BoJ Governor Kazuo Ueda stated that interest rate hikes would become appropriate once officials get convinced that the “economy and inflation will re-accelerate after a period of economic sluggishness”.
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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