Rising economic activity and lower inflation from Japan could dampen further gains in USD/JPY just as the broad US dollar’s ascent shows signs of stalling.
USD/JPY has been the best performing major currency pair over the past twelve months. Past performance, however, is not a guarantee of future performance. Rising economic activity and lower inflation from Japan could dampen further gains in USD/JPY just as the broad US dollar’s ascent shows signs of stalling.
But it hasn’t just been the Japanese yen that has been a loser against the US dollar. Dollar strength has driven all the other major currencies lower against the US dollar over the past year. Propelled by an increasingly hawkish Federal reserve, a strong rebound in economic activity over 2021, and from its role as maximum safe-haven currency during times of global economic and geopolitical upheaval.
US dollar tailwinds, however, could easily turn into headwinds as the US economy grapples with a slower pace of growth, record high inflation, and as other developed economies further recover from their post-pandemic slump in 2022.
Granted, the Bank of Japan looks nowhere near tightening policy anytime soon as it looks to defend low long-term bond yields, but inflation in Japan is still running low at 0.8% versus 7.5% in the US. In fact, Japan’s low inflation rate could benefit the yen should inflation remain stubbornly high in the US and growth end up surprisingly low.
Meanwhile, on a broader basis, last year’s big assent in the US dollar index (DXY), has begun to show signs of stalling. The index, which has more or less traded within a range of 96.929 – 95.504 since, now trades nearer to the bottom. Should the broader DXY stumble, expect the USD/JPY to be a big beneficiary.