The USD/JPY pair holds onto three-day gains near 157.00 during the European trading session on Wednesday. The pair is showing strength even as the US Dollar (USD) trades cautiously ahead of the monetary policy announcement by the Federal Reserve (Fed) at 19:00 GMT, indicating broader weakness in the Japanese Yen (JPY).
At the time of writing, the US Dollar Index (DXY), which tracks the value of the dollar against six major currencies, has fallen to approximately 99.10. The DXY is trading within a narrow distance of the five-week low of 98.75 hit last week.
The price of the Japanese yen this week
The table below shows the percentage change of the Japanese Yen (JPY) against the major currencies listed this week. The Japanese yen was the weakest against the New Zealand dollar.
| US dollars | euro | GBP | JPY | Canadian | Australian dollar | New Zealand dollar | Swiss franc | |
|---|---|---|---|---|---|---|---|---|
| US dollars | 0.10% | 0.18% | 0.96% | 0.13% | -0.12% | -0.21% | 0.15% | |
| euro | -0.10% | 0.12% | 0.91% | 0.08% | -0.16% | -0.27% | 0.09% | |
| GBP | -0.18% | -0.12% | 0.81% | -0.04% | -0.28% | -0.39% | -0.02% | |
| JPY | -0.96% | -0.91% | -0.81% | -0.79% | -1.05% | -1.14% | -0.77% | |
| Canadian | -0.13% | -0.08% | 0.04% | 0.79% | -0.24% | -0.34% | 0.02% | |
| Australian dollar | 0.12% | 0.16% | 0.28% | 1.05% | 0.24% | -0.11% | 0.26% | |
| New Zealand dollar | 0.21% | 0.27% | 0.39% | 1.14% | 0.34% | 0.11% | 0.37% | |
| Swiss franc | -0.15% | -0.09% | 0.02% | 0.77% | -0.02% | -0.26% | -0.37% |
The heat map shows the percentage changes in major currencies versus each other. The base currency is chosen from the left column, while the counter currency is chosen from the top row. For example, if you select the Japanese Yen from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent the Japanese Yen (base)/US Dollar (quote).
Investors are confident that the Federal Reserve (Fed) will cut interest rates by 25 basis points to 3.50%-3.75% as US labor market conditions remain weak since the beginning of the year.
Several members of the Federal Open Market Committee (FOMC), including Chairman Jerome Powell, warned of downside employment risks in their recent comments. In late November, New York Fed President John Williams said that “economic growth has slowed, and the labor market has gradually cooled,” adding that there is more room for further interest rate cuts.
Regardless of the Fed’s interest rate decision, investors will pay close attention to the Fed’s plot and Powell’s press conference for new signals about the monetary policy outlook.
Meanwhile, the Japanese yen was broadly weak as rising financial concerns in Tokyo weighed on the Bank of Japan’s bets on raising interest rates. Revised third-quarter GDP figures on Monday showed that Japan’s economy contracted at a faster pace of 0.6% versus an initial estimate of 0.4%.
Federal Reserve Bank Questions and Answers
Monetary policy in the United States is shaped by the Federal Reserve Bank (Fed). The Federal Reserve has two missions: achieving price stability and promoting full employment. The primary tool for achieving these goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, it raises interest rates, which increases borrowing costs throughout the economy. This causes the US dollar (USD) to strengthen because it makes the United States a more attractive place for international investors to park their money. When inflation falls below 2% or when the unemployment rate is very high, the Fed may lower interest rates to encourage borrowing, which affects the dollar.
The Federal Reserve (Fed) holds eight policy meetings annually, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC meeting is attended by twelve Fed officials – the seven members of the Board of Governors, the New York Fed president, and four of the remaining eleven regional Fed presidents, who serve one-year terms on a rotating basis.
In extreme cases, the Fed may resort to a policy called quantitative easing (QE). Quantitative easing is the process by which the Federal Reserve dramatically increases the flow of credit into a stuck financial system. It is a non-standard policy measure used during crises or when inflation is very low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. Quantitative easing usually weakens the US dollar.
Quantitative tightening (QT) is the reverse process of quantitative easing, where the Fed stops purchasing bonds from financial institutions and does not reinvest capital from bonds it holds outstanding, to purchase new bonds. This is usually positive for the value of the US dollar.
