What is the outlook for the US dollar/yen?

Intervention from the BoJ back in September/October 2022 turned the dollar around back then

>> Yen won’t be the weakest currency in 2024

Once again, US dollar/yen was repelled and what is notable in the past is that each time US dollar/yen has been repelled at this sort of level, we’ve seen the dollar give ground to other currencies as well. As we look for US dollar/yen to slide back to the 120-130 range over the next year, or two, the yen’s recovery against the US dollar could be an important factor that pulls the US dollar lower against other currencies as well.

Three times over the past two years US dollar/yen has tried and failed to really break above 150. The best we’ve seen is close to 152 in both October 2022 and November 2023, with the most recent attempt, in late February, just falling short of 151. Intervention from the BoJ back in September/October 2022 turned the dollar around back then, while the recent fall from 151 relates to speculation of BoJ policy tightening as soon as the March 19^th meeting.

As we all know, the US dollar’s attempts to break 150 are related to the fact that the Fed and other central banks have been lifting policy rates significantly, while the BoJ has stood its ground, with just some very minor tweaks to its yield curve control policy which targets 10-year JGB yields. But while all other G10 central banks have lifted rates significantly in recent years, just like the Fed, it does seem that the dollar loses ground across the board when dollar/yen is repelled from this150 region, just as the dollar gains against other G10 currencies when it is rising against the yen.

Now clearly it might seem logical that if the US dollar rises (falls) against the yen, it will do the same against other currencies as well. But, as we mentioned, other central banks have lifted rates in the same way as the Fed; some have done more, like the Bank of England. Hence there does not seem to be a reason why the dollar should gain and then lose ground against other currencies as it rises and falls against the yen. Of course, these movements against other currencies have been far more modest than we’ve seen against the yen with euro/dollar, for instance, not straying too far from a 1.05-1.10 range since the start of 2023.

Nonetheless, the ups and downs in US dollar/yen have been reflected in how the US dollar has moved against the euro and, on this basis alone, Mr. Steve Barrow, Head of the Standard Bank G10 Strategy forecasts the US dollar/yen to fall to the120-130 range it hints at an upside break of this 1.05-1.10 range for euro/US dollar with similar US dollar weakness elsewhere.

>> What will happen to the yen in 2024?

Another point to make is that both the yen and the US dollar are seen as so-called ‘safe’ currencies that rise when global risk aversion escalates. The yen’s status probably derives from the fact that it is a key funding currency for the carry trade so, when risk aversion soars and high-yielding currencies fall, investors buy back the yen which makes the yen rally.

US dollar/yen movements

The US dollar is also used as a funding currency, but its safe-haven status would seem to owe much to the fact that the US dollar is the most heavily traded and liquid currency along with US assets, such as treasuries. In theory, at least this might make us feel that the dollar and yen should move in tandem; rising together when risk aversion is high, and falling together when it is low.

However, what we’re observing now is that they are moving in opposite ways with yen strength associated with US dollar weakness against other currencies. Perhaps the fact that short-term rates are so high in the US, damaging the status of the dollar as a funding currency, creates this wedge between the performance of the yen and that of the dollar. This may mean that if global risk aversion rises the yen will gain but not the dollar if the latter’s roll as a funding currency has been damaged by such high US policy rates.

“We can only take an educated guess at all this, just as we can only take an educated guess that dollar/yen won’t rise back up and finally break 150. But for what it is worth, our view is that it won’t and, if the recent past is any guide that suggests the dollar will cede ground to other G10 currencies over time as US dollar/yen heads back to the 120-130 range”, Mr. Steve Barrow said.