Title: USD/JPY Extends Gains Amid Focus on U.S. Tariff Policy Developments
Original Author: FxStreet Editorial Team
Source: FXStreet (https://www.fxstreet.com/analysis/usd-jpy-extends-gains-as-market-monitors-us-tariff-policy-202507140742)
The USD/JPY currency pair continued to climb in early trading on Friday, driven by renewed momentum in the U.S. dollar and increasing market focus on potential shift in U.S. trade and tariff policy. This upward move in the pair follows a broad-based appreciation of the dollar against major currencies amid resurfacing expectations of a prolonged higher interest rate environment in the United States.
At the time of writing, the USD/JPY exchange rate remained firmly above the 157.00 mark, edging closer toward multi-week highs. With traders growing more attentive to geopolitical headlines and U.S. economic indicators, the short-term outlook for the pair suggests further upside, provided that ongoing risks remain supportive of the dollar.
Key Developments Behind USD/JPY’s Recent Strength:
Several factors are contributing to the strength of the U.S. dollar against the Japanese yen, including:
– Possible adjustments in U.S. trade and tariff policies under the current and potential future administrations.
– Hawkish stance from the Federal Reserve, signaling a continued wait-and-see approach on interest rate cuts.
– Weakness and policy divergence from the Bank of Japan (BoJ), which remains committed to ultra-loose monetary policies.
Let’s break down each of these contributors and explore their relevance to the USD/JPY movement over the weeks ahead.
U.S. Tariff Policy Outlook: A Potential Game-Changer
Markets are increasingly pricing in the likelihood that the outcome of the upcoming U.S. presidential election in November could lead to a significant shift in trade policy. Former President Donald Trump, currently leading polls among Republican candidates, has proposed the introduction of substantial new tariffs in the event of his reelection. These include talks of introducing a flat import tariff, in addition to heavier levies on Chinese goods.
– Traders are reacting preemptively to this possibility, pushing the greenback higher on assumptions of stronger inflationary pressure.
– A revival of protectionist policies may prompt U.S. firms to reconsider logistics and supply chain costs, which could feed into higher consumer prices.
– Rising inflationary expectations would in turn likely delay Fed rate cuts, keeping yields—and the U.S. dollar—elevated.
Federal Reserve Policy Outlook: Hawkish Pause Remains Intact
One of the primary drivers behind the dollar’s continued strength is the Federal Reserve’s commitment to maintaining restrictive monetary policy until inflation returns firmly to its 2% goal. While signs of cooling inflation have emerged in recent U.S. data, the Fed remains cautious.
– Fed Chairman Jerome Powell reiterated this week that more data will be needed before the central bank feels confident enough to begin reducing interest rates.
– U.S. core inflation remains sticky, especially in services and housing components, providing less incentive for the Fed to move quickly.
– The Fed’s Summary of Economic Projections (SEP) in June hinted at only one possible rate cut by year-end, down from previous estimates of two to three.
– In contrast, the BoJ is expected to keep interest rates near or slightly below zero at least through the rest of 2024, maintaining monetary divergence between the two economies.
This divergence in monetary strategy has become increasingly favorable to the dollar, as capital continues to chase higher yields in the U.S. bond market.
Japanese Yen under Pressure: Monetary Policy and Market Sentiment
The Japanese yen has faced sustained downward pressure over recent months, a result of ongoing ultra-loose policies from the Bank of Japan and Japan’s economic challenges. While inflation in Japan has begun to rise, wage growth and activity levels remain subdued relative to major developed markets.
– The BoJ has expressed openness to cautiously adjusting its policy stance, hinting at a move away from negative interest rates in
Explore this further here: USD/JPY trading.