On Monday, the greenback posted losses against all its counterparts but for the Japanese yen. USD/JPY is strengthening despite the high risks of intervention from Japan's government.
New record of USD/JPY
Following its prolonged bull run, USD fell against the basket of all currencies. Yesterday, DXY lost 0.8%, dropping to the 1.5-week low of 112.
The pressure on the greenback came, following the decision to appoint a new Chancellor of the Exchequer in the United Kingdom. On Monday, Jeremy Hunt scrapped almost all of Prime Minister Truss's planned fiscal measures.
Such an unexpected turn of events instilled optimism in the market and boosted risk assets such as GBP/USD and EUR/USD.
However, there is one currency pair with the stronger dollar. It is USD/JPY. Yesterday, it set a new record by soaring above the 149 mark.
On Tuesday night, the quote continued moving steadily to the upside and tested another 32-year high at around 149.10.
The divergence in the monetary policies of the United States and Japan is still the main driving force for the pair.
Last week, the US saw the release of consumer inflation data. The report improved market expectations that the US Federal Reserve would remain hawkish.
Most traders now anticipate another 0.75% rate hike from the US central bank at a meeting in November.
Some speculate that continuing inflation could urge policymakers to act even more aggressively and announce a 1.0% rate increase.
In light of hawkish expectations, 10-year bond yields are firm at the psychologically important level of 4%.
This is a seriously negative factor for the Japanese yen because a similar indicator in Japan still remains in the range of about 0%.
They come at JPY from all sides
The Japanese currency is now feeling tremendous pressure from all sides, which makes its exchange rate even weaker.
The Federal Reserve with its hawkish ambitions is not the only one responsible for the weaker yen. The Bank of Japan with its dovish mantras has also been adding fuel to the fire.
Last week, BOJ chief Haruhiko Kuroda said that he sees no point in changing its current monetary stance while inflation is robust and the economy needs stimuli.
On Monday, the official once again repeated those words. With his statement, Mr. Kuroda only dropped salt into the yen's wound. However, the major blow to JPY=X came this morning.
On Tuesday, Bank of Japan Governor Haruhiko Kuroda said he has no intention to resign despite Prime Minister Fumio Kishida's promise on Monday to find a new BOJ head.
As a reminder, Haruhiko Kuroda will reach the end of his term in April 2023.
If he does not go anywhere, he is likely to maintain the ultra-loose monetary policy stance. In such a case, the yen risks plunging even deeper.
Outlook for USD/JPY
The fall in the yen against the dollar to a new 32-year low provoked another response from the Japanese authorities.
Earlier today, Japan's Finance Minister Shunichi Suzuki said that the authorities will respond accordingly to excessive fluctuations in the exchange rate triggered by speculators.
Back in September, for the first time since 1998, the Japanese government held a large-scale intervention to support its national currency, which fell to 145.90.
This helped the yen briefly recover. However, 2 weeks after the intervention, it was sent into a tailspin after breaking through the critical level of 145. Since early October, the Japanese currency has lost more than 3% against the dollar.
All this indicates that the effect of re-intervention may be just as short-lived. The dollar is now strong enough to recover fairly quickly in case the Japanese authorities try to intervene and knock it down from its current peaks.
If Japan's Ministry of Finance does not take any measures in the near term, bullish pressure on the pair will mount.
According to Commerzbank, the USD/JPY bulls are likely to become more active ahead of the FOMC meeting in November.
Experts see the pair surge in the coming weeks.
