The Japanese yen rose broadly in the Asian market on Tuesday against a basket of global currencies, resuming strong gains against the US dollar, as safe-haven buying of the yen accelerated amid rising concerns over the stability of the Federal Reserve, the world’s largest central bank.
US President Donald Trump announced the dismissal of a Federal Reserve board member, in an unprecedented step that undermines confidence in the central bank’s independence and US assets.
Following more hawkish comments from Bank of Japan Governor Kazuo Ueda at the annual Jackson Hole Economic Symposium, expectations increased that the central bank will resume policy normalization soon. Investors are awaiting more new evidence on the path of Japanese interest rates for the remainder of this year.
Price Overview
The dollar fell against the yen by more than 0.5% to 146.99¥, from the opening level of 147.77¥, recording a high of 147.88¥.
The yen ended Monday down 0.6% against the dollar, giving up a large part of Friday’s gains following cautious comments by Fed Chairman Jerome Powell at Jackson Hole.
Dismissal of Lisa Cook
President Donald Trump announced late Monday the dismissal of Lisa Cook from her position on the Federal Reserve Board, citing allegations of misconduct related to mortgage loans.
The decision to dismiss a Federal Reserve board member is unprecedented and undermines confidence in the Fed’s independence and US assets.
Trump, who lacks the legal authority to dismiss Fed board members except “for cause,” backed away from his threat to fire Fed Chair Jerome Powell, whose term expires next May.
Cook’s departure from the central bank could accelerate the president’s reshaping of the Federal Reserve Board and the Federal Open Market Committee (FOMC), which sets interest rates. Her term had been set to run until 2038.
For her part, Lisa Cook said: Trump has no authority to dismiss me and I will continue to perform my duties. She added: there is no justification for dismissal and I will not resign.
Legally, Trump’s dismissal of Cook can be challenged in federal courts, and ultimately in the Supreme Court.
Congress had restricted the president’s power to unilaterally dismiss Fed governors under the Federal Reserve Act of 1913, which states that the president may only do so “for cause.”
Japanese Interest Rates
Bank of Japan Governor Kazuo Ueda said at Jackson Hole on Saturday that wage increases are extending beyond large companies, and are likely to continue accelerating due to tightening labor market conditions.
These remarks strengthened market expectations that the BOJ will resume rate hikes soon after pausing following January’s increase. Traders currently see a rate hike at the October meeting as likely.
The pricing of a 25-basis-point BOJ rate hike at the September meeting is currently steady at around 45%.
To reprice these expectations, investors are awaiting more data on inflation, unemployment, and wages in Japan.
Outlook for the Japanese Yen
Ho Min Lee, chief macro strategist at Lombard Odier, sees the yen strengthening to 140 per dollar over a 12-month horizon, but expects interest rates to remain in a narrow range in the near term.
He said: “We assume the next rate hike by the Bank of Japan will be in January next year, not October. The bank is likely to keep real interest rates deeply negative until the end of the year, and only then consider gradual increases.”
