USD/JPY May Climb Higher Before Yen Recovers

The USD/JPY currency pair may have more room to climb before the yen regains strength. A recent rise was fueled by reports that Japan's government pension fund skipped allocation talks in September, weakening one of the factors that had driven the yen's earlier rally.

The dollar remains favored due to its safe-haven appeal, supported by the Federal Reserve's hawkish stance and rising global debt concerns. However, a technology-driven stock market rally has reduced demand for traditional safe havens like the yen, despite increased volatility in carry trades.

Near-term, the USD/JPY pair could challenge its 200-day moving average and potentially reach the 159 level before a more stable yen recovery occurs. Longer-term prospects for the yen depend on the Bank of Japan's policy tightening, Fed outlook, equity market stability, and economic data.

Bank of Japan Deputy Governor Shinichi Uchida noted that the global AI boom has supported financial conditions but cautioned about potential setbacks if profit expectations are overly optimistic. Taking long positions on the yen as USD/JPY approaches 160 could offer a better risk-reward setup, either as policy becomes more supportive or as a hedge against market turbulence.