The US dollar remains highly sought after due to the country's robust economy, attractive assets, and the Federal Reserve's plans to raise interest rates further. The minutes from the September FOMC meeting suggested that another hike in the federal funds rate is likely before the year ends. The futures market currently assigns a 19% probability to an October rate increase and an 86% probability for December. Comparatively, the Bank of Japan's chances stand at 5% and 70% respectively.
Both central banks are likely to delay rate hikes until the end of the year, maintaining a wide bond yield spread that supports the appreciation of the USDJPY pair. This dynamic is further reinforced by minimal US participation in coordinated currency interventions. The Fed clarified that it did not use its own funds to buy the yen but acted as an agent for the Treasury.
The yen faces additional pressure from the volatility in the oil market, with Brent crude oil reluctant to drop below $100 per barrel. A Reuters survey highlighted that oil market volatility is the primary concern for Japanese companies, with 37% of experts citing it as a major threat. Currency fluctuations and higher BoJ interest rates were also noted as significant risks by 21% and 19% of experts, respectively.
Meanwhile, the yen is benefiting from a shift in investor sentiment regarding carry trades. The euro is increasingly being used for these trades due to the French fiscal crisis, which is causing capital outflows and weakening the single currency. EURJPY rates have hit their lowest levels since November, with French politicians calling for ECB interest rate cuts further undermining confidence in the euro.