After the US government took the extraordinary step of postponing the release of its April employment report on Friday, stock investors are beginning to wonder if the Yen will be able to maintain a strong hold. Some have even started panicking that this will be the beginning of a new trend that could see the USD skyrocket, weakening the value of other major currencies and resulting in a significant loss for investors from the previous week’s gain.
The question to ask is why do you think the Yen is rising now? Why is the dollar strong in relation to other major currencies? Here are three factors that might explain why the dollar may have been strong and the Yen weaker than usual during this time:
First, the economic data out of the US has been poor, to say the least. Companies have reported only mediocre results, leading many to fear that the US economy is going to slip into recession. To top it off, the Bank of Japan cut rates, reigniting fears that the central bank is ready to slow the economy further. This, combined with the weak US jobs report, makes the dollar stronger than ever.
Second, there is an upcoming US Federal Reserve meeting. The meeting will probably yield a number of policies for the Fed to consider, one of which is a possible hike in interest rates. Many believe that this meeting could push the dollar up, thus strengthening the position of the Yen in relation to other major currencies.
Third, after China announced its intention to restrict the flow of capital out of the country, Japan announced the sale of its second batch of treasury bonds. In response, the value of the yen rose sharply against the US dollar. Now, not only is the US economic data considered poor, the value of the Yen has also been bolstered.
All of these factors might mean that the Yen may start to rise, but that will be dependent on the strength of the US dollar. If the Dollar starts to weaken, as many expect, the Yen will be weakened.
Unfortunately, the economic data released on Friday will not offer much comfort to investors who are hoping for a stronger dollar. One reason is because despite a modest increase in consumer spending, overall consumer spending is still weak, but that is probably to be expected.
Consumer spending is affected by more than just the cost of living. The cost of basic necessities like food, gas, and clothing all affect the amount that people are willing to spend. So in order to keep consumers in line, the economy needs a strong dollar.
But a weak dollar does not have to mean weaker profits for US businesses. The more that Americans spend, the stronger the dollar is going to be.
In fact, the weaker the dollar, the stronger the yen is going to be. Because of this, the Dollar and the Yen should continue to move in lockstep, with the US dollar is holding its strong market position.
This could be a new trend. After all, after the Fed meeting on Tuesday, the dollar rallied and the Yen fell back. Will investors get the memo and start to realize the strong correlation between currency movements?
If they don’t, there will be a chance for this to turn into a trend. In the meantime, the strong dollar that has been in place for some time now has been helping the Yen and the Dollar stay strong together.