USD/JPY Forecast: US Dollar Outshines Japanese Yen as Safe-Haven Currency

USD/JPY Highlights

• USD/JPY reaches 10-day high, reflecting trade deficits and monetary easing.
• U.S. Dollar gains advantage as a safe-haven currency over the Japanese Yen.
• Interest rate differentials contribute to the Dollar’s strength against the Yen.

USD/JPY Overview

In the Friday’s trading session, the USD/JPY climbed to a 10-day high, reflecting the diminished appeal of Japan’s currency due to persistent trade deficits and ongoing monetary easing. The pair settled at 135.757, marking a gain of 1.241 or 0.92%. In contrast, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) closed at $68.62, experiencing a decrease of $0.60 or 0.87%.

Safe-Haven Shift: Dollar Outshines Yen

The U.S. Dollar and the Japanese Yen have traditionally been considered safe-haven currencies. However, in the current risk-off environment, the U.S. Dollar holds an advantage due to its favorable interest rate differential, despite concerns over the U.S. banking system and the debt ceiling. The status of the Yen as a safe-haven currency has been challenged.

Dollar More Attractive Currency

On Friday, the Japanese Yen weakened against the U.S. Dollar, with the USD/JPY reaching a high of 135.755. However, it is important to note that this level is significantly distant from the record high of 75.32 Yen against the Dollar witnessed during the European debt crisis in 2011.

The divergence in monetary policies plays a crucial role in the exchange rate dynamics. While Japan has continued with its monetary easing measures, the U.S. Federal Reserve has implemented multiple interest rate hikes over the past year, which has enhanced the attractiveness of the Dollar as compared to the Yen.

Bank of Japan Maintains Ultraloose Policy

The Bank of Japan, under the leadership of Governor Kazuo Ueda, recently decided to maintain an ultraloose monetary policy, in contrast to the U.S. Federal Reserve’s tightening stance. This divergence has further contributed to the attractiveness of the Dollar over the Yen.

Carry Trade Weakens Japanese Yen

One prominent trading strategy is the carry trade, which involves selling currencies with lower interest rates to acquire currencies with higher rates. With loose monetary policies in Japan, investors are inclined to sell the Yen as part of this strategy. Consequently, the Yen has weakened against various currencies, including the U.S. Dollar.

USD/JPY Forecast: Upward Trend Expected

Short Forecast: Given the continued monetary easing in Japan and the interest rate differentials between the two economies, the USD/JPY is expected to maintain an upward trend, with the Dollar maintaining its strength against the Yen. Traders are likely to favor the Dollar as a safe-haven currency in the current risk-off environment, which could lead to further gains in the pair.

Technical Analysis

The USD/JPY soared over the strong side of the daily technical pivot point at $134.518. The main trend is up, but short-term momentum remains down. However, Friday’s price action indicates momentum may be getting ready to shift to the upside.

A return of buyers could push the price above the recent top at $137.913. Possibly leading to a test of resistance (R1) at $138.452. Conversely, a pivot failure may lead to weakness and a possible decline to the nearest support (S1) at $132.471.

Over the near-term, the direction of USD/JPY will be dependent on how traders respond to the pivot at $134.518.

Resistance & Support Levels