USD/JPY trades cautiously around 149.50 with Trump’s tariffs on the horizon
- USD/JPY remains on edge around 149.50 ahead of Trump’s tariff announcement.
- Trump’s reciprocal tariffs are expected to lead to a US economic slowdown.
- This week, investors will focus on the US ISM Services PMI and the NFP data for March.
The USD/JPY pair trades with caution around 149.50 during North American trading hours on Wednesday. The pair remains on tenterhooks as investors await the announcement of planned reciprocal tariffs by United States (US) President Donald Trump at 20:00 GMT.
Ahead of Trump’s tariff plan, the US Dollar Index (DXY) trades lower around 104.00, assuming that higher levies will result in a global economic slowdown, including the US. Investors expect the impact of higher import duties will be borne by US importers. Such a scenario would lead to a sharp decline in the households’ purchasing power. Technically, the scenario of higher inflation and weaker household demand led to stagflation, making the Federal Reserve’s (Fed) job more complicated.
Fed officials have been guiding that interest rates should remain in the current range of 4.25%-4.50% for longer until they gauge how much Trump's tariffs will impact the inflation and economic growth.
This week, investors will also focus on the ISM Services Purchasing Managers’ Index (PMI) and the Nonfarm Payrolls (NFP) data for March, which will be released on Thursday and Friday, respectively.
Meanwhile, the Japanese Yen (JPY) trades lower against other peers as Trump policies could significantly impact Japan’s economic growth, given it is one of the leading trading partners of the US.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.