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Forex

Strong US economy partly driving drop in yen

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  © Reuters

TOKYO -- The yen's drop to a six-year low on Friday was partly fueled by the strong outlook for the U.S. economy, with quantitative easing expected to end as soon as October and interest rates seen rising as early as between spring and autumn of next year.

     The sudden announcement of additional monetary easing measures by the European Central Bank Thursday highlighted the relative strength of the U.S. economy and the greenback. The euro, which traded at the lower $1.31 range before the announcement, plunged to a 14-month low four hours after to the lower $1.29 range.

     The fall of the yen was also triggered by a comment by Bank of Japan Gov. Haruhiko Kuroda that day. "A further weakening of the yen would not be bad for the Japanese economy," he said to the press after the BOJ's monetary policy meeting. Investors took the central banker's comment as tacit support for a weaker yen and sold on the market.

     Interest rates, a determining factor for exchange rates over the medium term, also indicate a trend toward a strong dollar and weak yen. The yields on two-year U.S. bonds rose to the 0.55% level at one point on Friday, nearing a three-year high. On the other hand, two-year Japanese government bonds are expected to linger at 0.07%. Should the gap in interest rates widen, investors will move to buy higher-yielding dollars using the low-yielding yen, pushing the Japanese currency down further.

     Geopolitical risks could derail the trend, though. There is still much uncertainty on whether a lasting peace can be reached in Ukraine. The situation in the Middle East remains a pressing concern. Investors may buy back the yen if these risks push them toward more cautious strategies.

(Nikkei)

 

 

 

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