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Dovish policy of BoJ pushes yen to new lows

Dovish policy of BoJ pushes yen to new lows

The dollar/yen pair, which has been showing great performance thanks to the divergence between the US and Japan, continues its rally. The asset was considerably boosted by the results of the Fed's and BoJ's meetings.

Yesterday, the US regulator raised the benchmark rate by 75 basis points for the third time to combat inflation as soon as possible.

At the moment, the key interest rate is 3-3.25%. This is the highest level since the global financial crisis.

What is more, on Wednesday, the Fed unveiled its revised forecast for the key interest rate. Now, officials suppose that by the end of the year, the benchmark rate will reach 4.4%, which significantly exceeds markets' estimates.

The fact that the Fed is not planning to switch to a more dovish approach boosted the greenback. As a result, the DXY index reached a new 200-year high at the level of 111.72.

The US currency showed an overwhelming rise against other major currencies, including the yen.

On Thursday, the dollar/yen pair added 0.36%, whereas, during the Asian trade, it showed a stellar rise.

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Dovish policy of BoJ pushes yen to new lows

Today, the Bank of Japan decided not to change its monetary policy stance. Japan will remain stuck to the policy and will continue controlling the yield curve, buying bonds, and keeping interest rates at an ultra-low level.

Thus, the gap between the policies of the Fed and the BoJ has become even wider. Whereas the Federal Reserve is actively rising the benchmark rate, the BoJ is the only global regulator that has not raised interest rates yet.

Such an approach of the BoJ has been having a negative influence on the yen. Thus, since the beginning of the year, it has lost more than 20% against the greenback.

Now, the situation has become even worse due to a greater difference in the key interest rates of the US and Japan. In this light, the yen collapsed to a new low.

The Japanese currency slumped below 145 for the first time in 24 years amid the announcement that the BoJ will remain stuck to the dovish stance.

Analysts suppose that the Japanese government will hardly allow the dollar/yen pair to consolidate above the mentioned level. Now, when the yen hit 145, expectations of intervention in the currency market have become stronger.

Notably, not so long ago, Japanese politicians saw advantages in the falling yen. They supposed that a weak national currency was supporting exports and tourism.

However, the politicians have changed their minds since the weakening yen has become a real threat to the local economy.

Last week, several senior officials sounded a stronger warning. Today, the country's top currency diplomat, Masato Kanda, has left little doubt that the authorities will soon move from words to deeds.

Masato Kanda said that excessive fluctuations in the currency's exchange rate had a negative influence on the economy. That is why they are closely monitoring the yen and will not rule out any options.

He also emphasizes that the government has no intention to announce its actions. It means that the market should be ready for a hidden intervention.

The risk of intervention is rising very rapidly. Nevertheless, bulls of the dollar/yen pair remain active. The US dollar is rallying amid the Fed's hawkish approach and The BoJ's dovish policy.

Traders are ignoring the intervention risks since they do not believe that this would stop the downtrend in the yen.

In fact, the yen could be supported by a radical change in the regulator's policy. However, this will hardly happen until Haruhiko Kuroda is in power.

Most analysts suppose that the yen will slide even deeper.

According to Rabobank, in the mid-term, the dollar/yen pair will reach 147. If it breaks this level, it may jump to 150.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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