Treasury Yields Take Center Stage as USD/JPY Fluctuates
The USD/JPY pair has been influenced by US Treasury yields, which have driven its recent movements. Last week, the Japanese yen gained against the US dollar due to attempts by the US Treasury to limit long-dated bond yields.
However, when Treasury yields backed up later in the week, widening yield differentials with Japan, the relationship between yield spreads and USD/JPY kicked back into gear.
The past five days have seen a strong correlation between USD/JPY and US two-year and 10-year yields. The pair has also been influenced by expectations for further Fed tightening, which rose on Friday, with around 24 basis points of hikes priced in by year-end.
US Treasury Secretary Scott Bessent's decision to temporarily double buybacks of longer-dated securities failed to calm the long end, and a fiscal consolidation plan is expected this week. The plan will test whether the administration can convince investors that the fiscal trajectory is going to change.