HomeContributorsFundamental AnalysisYen Improves to 2-Week Gains as Fed Raises Rates

Yen Improves to 2-Week Gains as Fed Raises Rates

USD/JPY is almost unchanged in the Thursday session, after declining 1.1% on Wednesday. Currently, the pair is trading at 113.30. On the release front, the BoJ stood pat and maintained interest rates at -0.10%. The US, will release three key indicators – Building Permits, Philly Fed Manufacturing Index and unemployment claims. The week wraps up with consumer confidence data, with the release of UoM Consumer Confidence on Friday.

As expected, the Bank of Japan rate announcement on Wednesday was a non-event. The central bank opted to leave rates at -0.10%, where they have been pegged for over a year. The Japanese economy has showed improvement, recording four consecutive quarters of growth. However, the BoJ is unlikely to feel pressure to raise rates anytime soon, as inflation levels are still well below the central bank’s target of around 2 percent. The BoJ is comfortable maintaining its ultra-loose monetary policy for the time being. However, if the yen again falls below the 120 line, the US will likely complain of currency manipulation and unfair trade practices by Japan. It wasn’t that long ago, when yen was trading close to the 100 level, that the shoe was on the other foot, and Japan was warning that it would take unilateral action to combat what it viewed as currency manipulation. Clearly then, a "fair" exchange rate depends on the eye of the beholder.

There were no surprised faces when the Federal Reserve raised rates by a quarter-point on Wednesday. The hike, the second in just three months, raised the benchmark rate to the 0.75%-1.00% range. What was not expected, however, was the sharp drop of the dollar against its major rivals, including the yen. The markets were hoping that a red-hot US economy would propel the Fed to accelerate its pace of monetary tightening. There was disappointment as Fed Chair Janet Yellen reiterated that further rate hikes would be done gradually, pushing the dollar on Wednesday. As well, the US dollar may have lost ground due to traders and investors acting on "buy on rumor, sell on fact". This larges-scale selling of US dollars after the Fed hike has sent the US dollar broadly lower.

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