- The dollar remains offered and hits one-week lows near 113.50.
- Profit taking hurts the USD as Fed tightening expectations wane.
- USD / JPY ready to extend gains beyond 115.00.
The USD it heads lower on Friday, extending its reversal from multi-year highs at 114.70 to session lows just above 113.55. The dollar is on track to post its first negative weekly performance since late August.
US dollar falls as Fed tightening expectations wane
Investor expectations that the Federal Reserve would lead the world’s major central banks on the path of monetary policy normalization, which had been pushing the US dollar for the past two months, have faded into the background, ebbing away. demand for the US dollar.
The market has been modifying expectations of monetary tightening, as other central banks, such as the BoE or the BoC, have begun to anticipate the possibility of raising rates to cope with inflationary pressures.
Furthermore, profit-taking could also be responsible, at least in part, for the current weakness of the dollar. With the USD index hitting one-year highs against its main rivals last week, some investors may have closed long positions.
The broader picture, however, remains quite favorable to the dollar, with the yen hampered by an adverse monetary policy differential. The Federal Reserve is about to start rolling back its monetary stimulus program and will likely begin to hint at an interest rate hike in mid-2022. With the BoJ still engaged in ultra-expansionary policy and maintaining a control curve In yield, the widening gap between US and Japanese yields will remain clearly in favor of the USD.
USD / JPY: Seen appreciating beyond 115.00 – ING
According to ING Bank’s currency analysis team, the current reversal is just a corrective reaction before further appreciation: “In USD / JPY, we don’t want to miss a big bullish move through 115.00. We are convinced that the Fed will have to become more aggressive – USD positive versus underperforming (…) We are very bullish on USD / JPY and we see that the correction finds support somewhere in the 113.20 / 70 area. “