USD/JPY declines to near 147.30 as US Dollar falls, Fed-BoJ policy eyed
- USD/JPY trades lower around 147.30 as the US Dollar underperforms its peers.
- The Fed is certain to cut interest rates this week, while the BoJ is expected to hold them steady.
- The BoJ might keep the door open for further monetary policy tightening.
The USD/JPY pair falls sharply to near 147.30 during the European trading session on Monday. The pair faces selling pressure as the US Dollar (USD) underperforms its peers amid firm expectations that the Federal Reserve (Fed) will start the monetary-easing campaign on Wednesday.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.2% lower to near 97.40.
According to the CME FedWatch tool, traders have fully priced in an interest rate reduction by the Fed in the policy meeting on Wednesday.
Fed dovish speculation has been intensified due to escalating United States (US) labor market risks. A report from Morgan Stanley also showed that the Fed will cut interest rates in each of its monetary policy meetings remaining this year amid slowing job demand.
This week, investors will also focus on the US Retail Sales data for August, which is scheduled for Tuesday. The Retail Sales data is expected to have grown at a moderate pace of 0.3%.
Going forward, the major trigger for the Japanese Yen (JPY) will be the Bank of Japan’s (BoJ) monetary policy announcement on Friday. The BoJ is expected to keep interest rates on hold at 0.5%, while keeping the door open for more interest rate hikes.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.