USD/JPY Rises Further Above 161.00

USD/JPY continued to strengthen to around 161.45 in early Asian trading on Tuesday. The slight recovery of the US dollar provided some support for USD/JPY. However, the market expects that Japanese authorities may soon intervene in the foreign exchange market to prevent the depreciation of the Japanese yen (JPY).

The US manufacturing industry contracted for the third consecutive month in June due to weak demand and rising interest rates. The US ISM Manufacturing Purchasing Managers Index (PMI) fell to 48.5 in June from 48.7 in May. This data is lower than the expected value of 49.1. However, despite the weaker-than-expected US economic data, hawkish comments from Federal Reserve officials continued to support the US dollar.

On Friday, San Francisco Fed President Mary Daly said that monetary policy is working, but it is too early to tell when it is appropriate to cut interest rates. Daly further said that if inflation remains sticky or slowly declines, interest rates will need to remain higher for a longer period of time.

On the other hand, Japanese Finance Minister Shunichi Suzuki said authorities were concerned about the impact of “unilateral and rapid” exchange rate movements on the economy, adding that excessive volatility in currency markets was undesirable and authorities would respond appropriately to such movements. This could therefore support the yen in the short term and limit upside for USD/JPY. USD/JPY continues to trade near recent highs, OCBC analysts said. It is also close to its highest level since 1986. Markets are expecting Japanese authorities to intervene soon. While the level of the yen is a consideration, officials will also focus on the pace of depreciation as Japan’s intervention aims to curb excessive exchange rate volatility.

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