Interest Rates Impact on Dollar and Yen: Despite a week of economic news, the US dollar exhibited symptoms of weakness, causing it to shed some gains. This hurt the dollar versus other currencies. The dollar index dropped 0.06% to 103.88. This follows a 0.2% dip the day before. However, the currency has appreciated 2% since the month began. This is part of a six-week rise. This idea is supported by the strong US economy.
On Friday last week, Federal Reserve Chairman Jerome Powell offered more to support this notion. Powell implied that interest rates may need to rise further to stop prices from rising. However, his vow that the Fed will speak more carefully at future sessions was ambiguous.
“The Fed is clearly in a data-dependent mode,” said MUFG currency analyst Lee Hardman. “This week’s U.S. economic indicators, especially the PCE deflator and employment data, are getting more attention.” “The PCE deflator and employment data are crucial,” Hardman stated.
The long-awaited PCE numbers from the Federal Reserve will be released on Thursday. The Federal Reserve measures inflation best with PCE. This Friday, non-farm payrolls will be reported. Early data, like July job postings, may shift the market’s mood. A Reuters survey of experts predicts 9.465 million job opportunities in July.
The CME FedWatch program predicts a 78% chance that the Federal Reserve will maintain interest rates for the next month.
Also Read: Federal Reserve Gaze Shifts Markets: Dollar, Yen, and Yuan Await Powells Pivotal Speech
Based on how financial markets have priced in the Fed’s likely. The possibility that interest rates will rise by November has increased significantly, from 42% the week before to 60% now.
Meanwhile, purchasers across the Atlantic are eager for Thursday’s Eurozone CPI report. Hardman stated, “The European Central Bank’s September decision is uncertain, which gives the upcoming data a lot of weight.” “This emphasizes the next information.” Therefore, the data coming in will be crucial. The British pound recovered from recent lows to $1.262, while the euro gained only a modest amount to $1.0828.
Asia-Pacific is pressuring the Japanese yen. The growing interest rate gap between Japan and the US contributes to this. Since November of last year, the yen has held steady at 146,4 yen per dollar. This leads the currency’s value against the dollar to decrease by a terrifying 11% this year. Investors search for indicators of Japanese government involvement in the market.
Japan bought additional dollars in September to stabilize its currency after the dollar-yen exchange rate hit 145. Buy bucks to do this. The Japanese Ministry of Finance had to buy a lot of yen to restore the exchange rate to 140 yen per dollar. Charu Chanana, a Saxo market strategist, thinks “we could see more pressure on the yen.” If U.S. economic signals continue to strengthen, rates will rise.
“The yen may face more pressure.” Chanana says intervention chances have dropped. This is intriguing because Bank of Japan Governor Kazuo Ueda didn’t mention currency fears at the most recent Jackson Hole meeting. This adjustment was crucial.
Our Reader’s Queries
How does interest-rate affect the dollar?
When the Federal Reserve raises the federal funds rate, it usually leads to a rise in interest rates across the economy. This, in turn, strengthens the dollar. The increased yields attract foreign investors who are looking for higher returns on bonds and other interest-rate products.
Why is the yen getting stronger against the dollar?
On Friday, the yen surged, building on its largest gain in almost a year. Traders are increasingly confident that the Bank of Japan will eliminate the world’s only negative interest-rate policy as early as this month. This has led to a consolidation of the yen’s position in the market.
Do interest rates affect exchange rates?
When interest rates are higher in an economy, lenders can earn a better return compared to other countries. This makes the economy more attractive to foreign investors, who bring in capital and cause the exchange rate to increase.
What will happen to the yen dollar exchange rate?
According to him, the exchange rate may hit 130 yen to the dollar by mid-2024 if the U.S. begins to seriously reduce rates. Additionally, if long-term rates in the U.S. continue to drop, the yen’s fair value will increase even more.