$156 Break: USD/JPY's Key Support Fails as Yen Surges Against Dollar
The USD/JPY pair has broken down its key support level of 156, plummeting to just below 154. This move comes as investors expect the Bank of Japan (BOJ) to further hike interest rates, causing the Japanese Yen to strengthen against the dollar.
This weakening of the Yen is a result of the traditional carry trade unwinding, where investors borrow the Yen at cheaper rates and buy US assets. Since the US Treasury intervened on August 1 to support the Yen, its value has strengthened from a four-decade low of 164.
The divergent movement between Treasury yields and the USD is unusual in the markets. This phenomenon suggests that high US government bond yields no longer represent a strong US economy or a strong dollar. Instead, investors are pricing in a high risk premium due to high inflation expectations and concerns about the credibility of US sovereign debts.
The weakening USD may continue to support the upside potential in risk assets, particularly AI-linked tech stocks. Commodity prices will also benefit from the falling dollar. Cryptocurrencies may have room to run with this macro tailwind. However, caution remains in the US debt markets if government bond yields continue their upsurge.