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On Monday, the Yen weakened in Asia. USD/JPY changed hands at 100.51, up 0.29%. This is partly because investors are looking forward to remarks by the US Fed chief later in the week to set the tone, and partly because Japanese inflation data will also be in focus as investors assess the need for further stimulus in the world’s third largest economy. Japan’s Yen is on the defensive, and it appears as though the typically anti-risk currency is finding greater momentum in shifting yield expectations than sentiment trends, with USD/JPY tracking two-year US Treasury yields.

The US Dollar didn’t just gain on JPY, but it also traded broadly higher against its major counterparts as FOMC rate hike speculation builds ahead of a much-anticipated Janet Yellen speech on Friday. Investors seemed to be driven by statements from San Francisco Fed President John Williams, whose pronouncements are closely monitored because the markets see him as a close confidante of the Fed Chair.

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In a published essay at the beginning of the week, Williams first stated that the Fed should alter its policy-setting framework to allow rates to stay lower for a longer time. This boosted the Yen for that day as it is bearish for the dollar. Yen traded at 101.440 to 100.856, with a volume of 44,851. On Tuesday, however, New York Fed President Bill Dudley made a conflicting hawkish assertion in a televised interview. He railed against the markets’ under-pricing of on-coming hikes and said that a rate hike at the Fed’s next policy meeting in September is possible. Atlanta Federal President, Dennis Lockhart, seconded this. It returned bearish for Yen, and it dropped for the day, closing at 99.549 from an opening of 101.326.

On Thursday, Williams eventually changed his dovish statement to be even with other Fed Presidents, and said that he would prefer rate hike rates sooner rather than later. This further brought down the Yen on that market day.

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Tuesday, Thursday and today’s drops are a part of a bigger downward trend that started in July 29. Yen started becoming weaker on the ends of July when people expected the BoJ to announce an increase in interest rates, but then they decided to remain at -0.1. Not only was this disappointing to investors, BoJ also decided to ease monetary policy further. Annual ETF purchases were almost doubled from current 3.3 trillion yen to 6 trillion yen.

Conclusion

The yen fell today against the dollar after Fed officials indicated that they are considering rate hikes this year, while Bank of Japan Governor Haruhiko Kuroda suggested that he is open to increased easing. BoJ won’t hesitate to act based on discussions on the results of a comprehensive review at its September 20-21 board meeting, Kuroda said in an interview published Saturday in the Sankei newspaper.

According to Yousuke Hosokawa, head of FX sales team in Sumitomo Mitsui Trust Bank Ltd., the dollar has some more room to gain ahead of the key event. The dollar may rise slightly higher against the yen given that there is scope for US Treasury yields to climb.

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