USD/JPY struggles to extend upside above 149.00, US PPI awaited
- USD/JPY aims to extend its upside above 149.00 as traders pare Fed dovish bets.
- The US CPI report showed that the impact of Trump’s tariffs has started feeding into inflation.
- US-Japan trade tensions keep the Japanese Yen on the backfoot.
The USD/JPY pair faces selling pressure while extending its upside above 149.00 during the European trading session on Wednesday. The pair struggles as the US Dollar (USD) takes a breather after refreshing the three-week high, following signs from the United States (US) Consumer Price Index (CPI) report of June that prices of imported goods have increased.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, clings to gains near the three-week high around 98.60.
Sign of a resumption trend in inflationary pressures on the upside has forced traders to pare bets supporting interest rate cuts by the Federal Reserve (Fed) in the September monetary policy meeting. Meanwhile, the Fed is widely anticipated to leave interest rates steady in the range of 4.25%-4.50% in the policy meeting later this month.
Going forward, investors will focus on the US Producer Price Index (PPI) report for June, which will be published at 12:30 GMT. Investors will pay close attention to the data as it will indicate how much producers raised prices of goods and services at factory gates to offset the impact of tariffs imposed by President Donald Trump since his return to the White House.
Meanwhile, the Japanese Yen (JPY) continues to remain on the backfoot amid trade tensions between the US and Japan as Washington has imposed 25% tariffs on imports from Tokyo, which are separate from sectoral levies, after failing to close a trade deal during the 90-day tariff pause period. However, Tokyo continues to negotiate on trade with Washington to close a trade deal before the new deadline of August 1.
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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