The USD/JPY extends its winning streak for the third trading day on Tuesday, trades 0.24% higher to near 156.00 during the European trading session. The pair strengthens on continued US Dollar’s (USD) outperformance, following Kevin Warsh’s nomination for Federal Reserve’s (Fed) new Chairman and the upbeat United States (US) ISM Manufacturing Purchasing Managers’ Index (PMI) data for January.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades close to its weekly high of 97.73.
On Friday, US President Donald Trump nominated Kevin Warsh for the succession of Fed’s highest post. The event led to a sharp increase in the US Dollar’s appeal as investors expect interest rate cuts in Warsh’s tenure would be slower than other candidates who had been in the running.
Meanwhile, the US ISM reported on Monday that the manufacturing sector activity returned to growth after declining for several months. The Manufacturing PMI came in at 52.6, higher than estimates of 48.5 and the prior release of 47.9. A figure above 50.00 is seen as expansion in the business activity.
Going forward, investors will focus on the US ADP Employment Change and the ISM Services PMI data for January, which will be released on Wednesday.
On the Tokyo front, the Japanese Yen (JPY) broadly underperforms even as Bank of Japan (BoJ) Summary of Opinions (SOP) showed on Monday that majority of officials advocated the need for tightening monetary conditions further.
US Dollar FAQs
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.
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.
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.
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.
Source: https://www.fxstreet.com/news/usd-jpy-extends-winning-streak-as-us-dollar-rebounds-us-data-awaited-202602031139
