USD/JPY Fundamental Daily Forecast – Dollar/Yen Firms as Investors Bet on Early Fed Tapering

The Dollar/Yen closed higher on Friday, supported by a rise in U.S. Treasury yields as investors increased their bets on a sooner-than-expected Federal Reserve tapering, following the release of a solid producer price inflation report.

The spread between U.S. Government bond yields and Japanese Government bond yields widened, making the U.S. Dollar a more attractive asset. The spread widened after a government report on producer prices came in stronger-than-expected.

Gains were likely limited by a plunge in the U.S. stock market. This may have sent investors into the safety of the Japanese Yen.

On Friday, the USD/JPY settled at 109.912, up 0.179 or +0.16%.

10-Year Treasury Yield Advances as Producer Prices Rise More than Expected

U.S. Treasury yields rose Friday morning as the producer price index showed that parts of the U.S. economy are still contending with inflation.

The yields on the benchmark 10-year Treasury note added 3.9 basis points, climbing to 1.339%. The yield on the 30-year Treasury bond rose by 3.5 basis points to 1.934%.

US Producer Prices Beat Consensus Estimate

The U.S. Producer Price Index rose 0.7% in August, above the consensus estimate of 0.6%. The reading marked a slowdown from the 1% gain in wholesale prices in July but the index is now up 8.3% year over year, the largest increase since at least 2010.

Fed’s Mester Says She Would Still Like to Begin Taper This Year

Cleveland Federal Reserve Bank President Loretta Mester said on Friday that she would still like the central bank to begin tapering asset purchases this year, joining the chorus of policymakers making it clear that their plans to begin scaling back support were not derailed by weaker jobs growth in August.

“I don’t think the August employment report has changed my view that we’ve made substantial further progress” on both inflation and employment, Mester told reporters.

The Fed’s policy-setting committee will have to decide on the best way to move forward and there may be different views on what the “precise timing” of taper should be, Mester said.

But Mester said she would be comfortable with starting the taper this year and winding down the purchases over the first half of next year, repeating views she shared in late August.