**USD Strength Reasserts Amid Hawkish Fed, While Yen and Yuan Face Pressure**
*Adapted and expanded from an article originally published on Mitrade by Investing.com*
As global trading resumed early Tuesday, the US dollar maintained its firm stance near recent highs, reflecting investor confidence rooted in the Federal Reserve’s hawkish monetary policy stance. The momentum underscores rising market expectations that US interest rates will remain elevated for longer than previously anticipated. Major rivals, including the Japanese yen and the Chinese yuan, remain under pressure amid local currency weakness and persistent economic fragility.
This article delves into current forex market dynamics, explaining the factors supporting dollar strength and the struggles facing Asia’s key currencies. Additionally, it outlines broader trends affecting global currency markets and what traders should watch in the weeks ahead.
## Federal Reserve’s Hawkish Stance Bolsters US Dollar
The US dollar index, which tracks the greenback against a basket of six major currencies, rose 0.1% to 103.38 on Monday. This increase places the index near a two-month high, continuing the dollar’s rally that began in mid-July. Several factors contributed to this bullish sentiment:
– **Rising Treasury Yields**: US Treasury yields have sharply increased in recent weeks, with the 10-year yield hitting 4.34%, the highest level since 2007. Stronger yields tend to attract capital inflows into US-denominated assets, pushing the dollar higher.
– **Strong US Economic Data**: Recent indicators such as retail sales and jobless claims point to a resilient US economy, strengthening the belief that the Fed can maintain higher interest rates without initiating a recession.
– **Federal Reserve Minutes**: Records from the July FOMC meeting confirmed that a majority of officials continue to view inflation as a significant threat. This supports market assumptions that further rate hikes remain possible before the end of 2024, or at the very least, that rate cuts will not arrive as soon as earlier expected.
### Market Expectations for Rate Moves
As of late August 2024, interest rate probabilities embedded in Fed Funds Futures indicate:
– A roughly 90% chance the Fed will keep rates on hold at the upcoming September meeting.
– Increasing sentiment that a hike might occur in November, depending on upcoming macroeconomic releases, especially labor and inflation data.
This cautious, data-dependent approach suggests that the Fed is prioritizing inflation control, even at the risk of slowing down segments of the economy.
## Japanese Yen Continues to Weaken
The Japanese yen remains under significant pressure, with USD/JPY trading at 146.25, close to nine-month highs. The yen has depreciated substantially throughout 2024, largely due to the stark contrast in policy between the ultra-loose Bank of Japan (BoJ) and tightening Fed policy in the US.
### Key Points Driving Yen Weakness:
– **Interest Rate Differential**: Unlike the Fed, the BoJ continues to maintain negative interest rates and uses yield-curve control as part of its monetary toolkit. This keeps Japanese government bond yields low, making the yen less attractive to investors.
– **Lack of Policy Shift from BoJ**: Despite hopes earlier this year that Japan might start normalizing policy, BoJ governor Kazuo Ueda reiterated that the Bank will not raise rates until inflation sustainably exceeds its 2% target.
– **Potential for Currency Intervention**: Japanese officials, including Finance Minister Shunichi Suzuki, have expressed concern over the depreciating yen. However, intervention efforts remain verbal for now. Japan last stepped in to support the yen in late 2022 when the currency weakened beyond 150 per dollar.
### Implications for FX Traders:
– If USD/JPY crosses the 150 threshold again, markets may expect coordinated intervention.
– Until then, the pair could see continued upward momentum, especially if US yields remain elevated.
## Chinese Yuan Faces Pressure as Economy Slows
Another focal point in the forex market has been
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