The U.S. dollar suffered a repulsion in momentum on Thursday, with investors worried about the impact of escalating global trade war on inflation and growth in the United States, while the Japanese yen rose slightly on favorable domestic conditions for further policy tightening.
Escalating global trade tensions and concerns about the risk of a US recession have shaken global markets and sparked sharp currency volatility, as traders fluctuated between relief and concern over sudden policy changes in US President Donald Trump.
Asian markets calmed on Thursday, as investors took advantage of the headline storm around U.S. trade policy and shifted their focus to developments in Japan.
The Japanese yen was among the biggest gainers against the weakening dollar, rising 0.3% to 147.75, following comments by Bank of Japan Governor Kazuo Ueda, who confirmed the bank’s intention to reduce its “very large” balance sheet”.
While the Bank of Japan is expected to keep interest rates unchanged at next week’s policy meeting, more than two-thirds of economists polled by Reuters expect a 25 basis point rise to 0.75% in the third quarter, likely in July.
Sonal Desai, Chief Investment Officer at Franklin Templeton Fixed Income, said: “The Bank of Japan is likely to raise rates at least twice more this year, but we tend to have three”.
“Not only is the Bank of Japan more confident in the strength of wages this year, but growth is also likely to remain rapid to allow for further increases.”
Separately, a major Japanese trade union announced that its members had reached agreements with employers on large wage increases for the third year in a row. Many of Japan’s biggest companies, from tech giants to Toyota, have met union demands for higher wages.
Japanese Yen Holds Together Amid Economic Concerns, Tensions
The Japanese yen is hovering around a five-month high against the U.S. dollar, following a continuing weakness in the greenback amid fears of potential economic fallout amid trade tensions caused by U.S. President Donald Trump’s tariffs. Moreover, the Bank of Japan’s hawkish policy, amid rising wage growth and inflation, keeps benchmark government bond yields at their highest level since 2008.
Many of Japan’s largest companies have met union demands for deep wage increases for the third year in a row, seeking to help workers cope with inflation and retain employees amid labor shortages. This is expected to lead to higher inflation, and has pushed bond yields up to 1.575%, supporting a path of sustained gradual increases from the Bank of Japan. Many of Japan’s biggest companies, from tech giants to Toyota, have met union demands for higher wages. The USD/JPY pair traded at 148.22, with its last price in October last year.
The US dollar initially fell against the Japanese yen, but seems to be trying to show some flexibility. So, I’m going to monitor this more than anything else. I think we might be in the midst of a basic pattern, and we’ll have to wait and see. At this point, I maintain my relatively neutral position, although I remain optimistic in the long term.
The Japanese yen was among the biggest gainers against the weakening dollar, rising 0.3% to 147.75, following comments by Bank of Japan Governor Kazuo Oida, who confirmed the bank’s intention to reduce its “very large” balance sheet.
I think this will eventually change and continue its upward trajectory. As you can see, we recently achieved a higher high and a lower low. So, this generally means that we will see a lot of side fluctuations.
Trump threatens to raise tariffs and their impact on markets
Trump threatened to impose more tariffs on EU goods on Wednesday, while major U.S. trading partners vowed to retaliate against tariffs imposed so far.
The Swiss franc rose thanks to safe orders, hovering near a three-month high of $0.8815.
The euro and pound also held near multi-month highs, with their last purchases at $1.0880 and $1.2955, respectively.
The euro drew additional support from Germany’s fiscal recalibrating, while sterling benefited from Britain’s more pragmatic approach to Trump’s tariffs.
Meanwhile, the Australian and New Zealand dollars came under pressure amid weak risk appetite, with the former down 0.35% to $0.6299, while the latter falling 0.33% to $0.5712..
Against a basket of currencies, the dollar settled at 103.57, close to a five-month low. U.S. inflation rose slightly less than expected in February, but the improvement it offers may be temporary, as the data did not fully cover Trump’s tariff series.
James Riley, chief market economist at Capital Economics, said: “What is further uncertain is the outlook for future inflation and the state of US economic activity, largely due to the unpredictability of US trade policy.” It is these issues that drive the markets, and the report offers few new insights into either.”
Analysts say uncertainty over U.S. trade policy is dampening the outlook of global central banks, as policymakers look to strike a delicate balance between supporting economic growth and reining in any potential rise in inflation. The Canadian dollar fell 0.2% to 1.4398 against the U.S. dollar, after the Bank of Canada cut its key interest rate by 25 basis points on Wednesday.
