USD/JPY claws back early losses and rebounds to near 150.20 as US Dollar recovers

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The USD/JPY pair recovers its early losses and rebounds to near 150.20 during the late European trading session on Friday. The pair bounces back as the US Dollar (USD) licks its wounds despite uncertainty over trade relations between the United States (US) and China remaining intact.

USD/JPY recovers early losses as the US Dollar rebounds from the 10-day low.
US-China trade tensions improve the safe-haven demand of the Japanese Yen.
Fed dovish bets have escalated amid US labor market risks.

During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, turns flat around 98.35 after recovering from the 10-day low of 98.00 posted earlier in the day.

Trade relations between two biggest powerhouses of the world are going through a rough phase as Washington has imposed additional 100% tariffs on imports from Beijing in response to the announcement of rare earths export control measures.

Additionally, firming Federal Reserve (Fed) dovish bets are also expected to remain a major drag on the US Dollar. According to the CME FedWatch tool, traders have fully priced in a 50-basis-points (bps) reduction in interest rates in the remaining year and see a 19.6% chance that the Fed could cut borrowing rates by 75 bps.

Meanwhile, the Japanese Yen (JPY) trades higher against its peers as US-China trade tensions have increased its safe-haven demand.

On the domestic front, investors remain uncertain over the Bank of Japan’s (BoJ) monetary policy outlook for the remaining year. “I would like to keep gathering more information and scrutinise various data that comes out leading up to our October policy meeting,” Ueda said in a news conference in Washington earlier in the day, according to Reuters.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.