The US Dollar (USD) has maintained its strength against the Japanese Yen (JPY), driven by persistent high US inflation data.

Federal Reserve Chairman, Jerome Powell, reiterated this point on May 14th at the Foreign Bankers’ Association event in Amsterdam. He stated, “We did not expect this to be a smooth road. We’ll need to be patient and let the restrictive policy do its work. We think that it’s probably a matter of just staying at this stance for longer.” There has been growing concern that sustained tighter monetary policy could eventually weaken job growth and risk a recession.

Based on the April U.S. Consumer Price Index (CPI) report, released on May 15th, it appears this “patient policy approach” seems to be unfolding. CPI, which measures the cost of goods and services in the U.S., rose 3.4% from one year ago. Core CPI, excluding food and energy items, increased 3.6% annually, marking the smallest increase since April 2021.

These numbers might alleviate recent fears about the necessity for future rate hikes, allowing the Federal Reserve (FED) to maintain its current restrictive policy. A couple more months of similar downward-trending CPI reports could shift the focus to when the FED might begin reducing rates. Additionally, Japan’s Q1 GDP was announced on 16th May. Their economy shrank 2% annually; greater than what was anticipated at 1.5%. This preliminary number illustrates their economy is not growing, which poses a challenge for the BOJ as they’re trying to move interest rates higher, as part of their tightening bias.

With that being said, the USDJPY chart (April 29th – May 15th) below, comparing USD against JPY, shows prominent USD appreciation, despite recent Bank of Japan (BOJ) currency interventions, in support of JPY. The Central Bank interventions occurred on April 29th and May 1st.

The chart includes two daily market data points (4:00 AM EST and 4:00 PM EST), highlighting the BOJ intervention times and the resilience of USD. Prior to the first BOJ intervention on April 29th, USDJPY was trading just above 160.00. By May 3rd, after the second intervention, USDJPY reached a low of approximately 151.90. Following the graph through to May 15th, we see USDJPY settling at a rate similar to where it was prior to the BOJ interventions, demonstrating the resilience of the US Dollar, underpinned by higher U.S. interest rates. The primary reason for continued JPY depreciation against USD is directly related to the interest rate gap between the U.S. and Japan and the continued divergence between their respective economies.

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