USD/JPY pair, Weekly chart
The monetary policy divergence occurs between the hawkish Federal Reserve and the dovish Bank of Japan, resulting in a further widening of the interest rate differential, which is seen weighing negative on the Yen and increasing the support of the dollar.
The USD/JPY pair is keeping its uptrend momentum towards the ¥140 key level as the dollar is getting support from the growing expectation that the Federal Reserve will hike its interest rate by another 75 bps at the next FOMC meeting on September 21, which would be the third 75bps hike in a row, sending the Fed’s funds rates to near 3%.
As a result of the reluctance of the Bank of Japan to tighten its accommodative monetary policy together with the safety bets on the greenback due to recession fears and the Ukraine war, the USD/JPY pair soared to ¥140 level, nearly 40% off March 09, 2020, the bottom of ¥101.
Despite the weaker Yen giving a boost to Japanese exports, the weakness against the greenback creates problems for the BoJ because it increases the costs of all importing materials, including oil, gas, metals, and food supplies which are denominated on the dollar.
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