Now deeper to the downside, then sharply to the upside. The next rate hike in the US should have clearly outlined the prospects for the asset, but this only increased uncertainty.
Dollar fears
Yesterday's climax in the currency market was the Federal Reserve's meeting on monetary policy. Moreover, this time the event attracted even more attention than usual.
The market did not even doubt that the central bank would again raise interest rates by 75 bps, but at the same time it was preparing to hear less hawkish rhetoric from US officials.
Recall that this year the United States launched the largest anti-inflationary campaign among all countries in the world, which, of course, could not but leave a negative imprint on the country's economy.
Signs of a recession looming on the horizon have left many doubting that the Fed will continue to raise rates at the same aggressive pace.
Speculations on this topic grew noticeably ahead of the November FOMC meeting, which greatly undermined the dollar's position at the beginning of the week in all major areas, and especially against the yen.
Yen hopes
This year, the yen has fallen against the dollar by more than 20% due to serious discrepancies in the monetary policy of the US and Japan.
Unlike its US counterpart, the Bank of Japan has not declared war on inflation and remains ultra-soft on its monetary policy while maintaining ultra-low interest rates.
Now, with the possibility that America might slow down its pace of tightening, those who are bullish on the yen are getting hopeful. If the BOJ-Fed rate gap does not rise as sharply as before, this will likely keep the JPY from making new lows.
Japan's interest rate is currently at -0.1%, while the US rate was raised to 3.75-4% yesterday. As expected, the Fed did not back off from the set pace and again raised the rate by 75 bps.
Interestingly, the market initially ignored the next rate hike in the US, focusing more on the Fed's statement. In it, many traders saw dovish notes and hints that the central bank is really going to slow down in the future.
Such fears literally at the moment pulled down the dollar. And again, the USD/JPY major showed the worst dynamics. Immediately after the Fed's verdict, the quote fell by 1% and tested a low of 145.66.
Powell's decisive word
However, yesterday's triumph of the yen was fleeting. The mood on the market changed overnight after the speech of Fed Chairman Jerome Powell.
It is not that the official outlined the future trajectory of tightening quite clearly, but he made it clear that the final level of interest rates will be higher than previously expected.
"It is very premature to think about the suspension. We still have some way to go," said Powell during a press conference.
He also stressed that insufficient tightening of monetary policy could lead to entrenched inflation.
The hawkish comments served as rocket fuel for the dollar. It soared across the board, but again, the strongest moves were seen in tandem with the Japanese currency.
As of Wednesday's close, the yen lost all of its previous gains and fell 2% against the greenback as its hopes for an easing monetary divergence between the US and Japan collapsed like a house of cards.
It is now clear that the divergence in monetary policy between the Fed and the BOJ will grow. This significantly darkens the outlook for the yen, but at the same time increases the uncertainty about the further dynamics of the USD/JPY pair.
Threats from Japan
Now that the dollar has secured strong fundamental support, analysts are predicting its steady rise on many fronts. But will it be able to continue its enchanting rally against the yen in the near future?
Most experts believe that the greenback's growth will be severely limited by the risk of intervention. The Japanese government is still keeping a close eye on exchange rate fluctuations and will most likely be quick to press the red button if the dollar bulls become active again.
Recall that in September, Japan carried out its first intervention since 1998 to support its affected currency. Last month, the authorities also intervened in the market, spending a record $42 billion to do so.
Based on the experience of past interventions, analysts believe that any intervention will have limited impact as long as the policy gap between the BOJ and the Fed persists.
However, it is still not worth ignoring the risk of intervention when trading the USD/JPY pair, given the recent statement by the Japanese Ministry of Finance that the government's resources for intervention are not limited.
