- USD/JPY attracts bids near 144.00, however, the outlook is still uncertain.
- Moody’s downgraded the US Sovereign Credit rating to Aa1, citing mounting debt concerns.
- Japan’s Ryosei Akazawa is scheduled to visit Washington for the third round of trade talks this week.
The USD/JPY pair gauges ground near 144.00 during European trading hours on Tuesday, but is still down 0.2% near 144.50. The pair attracts bids as the US Dollar (USD) rebounds after revisiting the weekly low, which it posted on Monday. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, finds temporary support near 100.10.
However, the overall trend of the Greenback is still uncertain as Moody’s Rating has downgraded the United States (US) Sovereign Credit by one-notch to Aa1 from Aaa in the wake of mounting debt concerns, which are expected to widen further in the wake of ‘big beautiful bill” to be announced this week. According to a report from Reuters, the tax bill by Republicans would increase the current $36 trillion debt by $3 trillion-$5 trillion.
US credit rating erosion has further dampened the US Dollar’s credibility, which is already battered by Washington’s “ever-changing” announcements on tariff policies.
Domestically, Federal Reserve (Fed) officials continue to guide a “wait and see” approach as an increase in tariffs by the administration is expected to de-anchor consumer inflation. Such a scenario discourages the Fed from lowering interest rates.
On the Tokyo front, investors seek fresh cues on when Japan will close a bilateral deal with the US. Earlier in the day, Japan’s Kyodo News agency reported that top trade negotiator Ryosei Akazawa will visit Washington for the third round of trade talks. This indicates that the Asian would not be the one with whom the US could announce any trade deal.
On Monday, the White House’s economic advisor, Kevin Hassett, signaled hopes of more trade deals sooner. “I would not be surprised if there are more trade deals this week,” Hassett.
During European trading hours, the Kyodo News Agency reported that Japan is considering accepting lower US tariff rates and not demanding an exemption.
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.