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US Inflation Warning Drags Dollar Down

Currency Converter Calculator's Forex News Roundups aim to keep you abreast of the latest developments in the international currency exchange market. In this edition, we take a look at why the Greenback remains under pressure and how the Japanese Yen (JPY) reacted to Prime Minister Abe handing in his resignation.

Inflation Warning Adds Selling Pressure Onto USD

The US Dollar (USD) fell against various major and Emerging Market (EM) currencies towards the end of the week after pricing in the US government bond market indicated that high inflation is expected amongst investors.

The Dollar index, which measures the value of the Greenback relative to six other hard currencies, fell by over 0.7 percent on Friday – and the US Dollar remains under selling pressure.

The expectation of high inflation in the United States over the coming months isn't the only factor that's driving down the value of the Greenback. Other reasons include the progress that's being made to develop a vaccine for COVID-19, which is ultimately bad news for the USD as it’s a safe haven asset, so the demand for it falls whenever the global economic outlook looks less gloomy.

Last month, the Dollar temporarily lost its status as the safe-haven investment of choice, with gold dethroning it. However, this proved to be short-lived, and the Greenback soon reasserted itself as the favored safe-haven asset to invest in times of economic turmoil and uncertainty.

Stock markets performing well towards the end of the week is another factor that is dragging on the Dollar's performance – and we are likely to see more and more money flowing back into equities over the coming weeks and months as investors' appetite for risk increases.

We can also expect a similar trend with Emerging Market currencies, at the expense of demand for the much safer US Dollar.

JPY Jumps Following Japanese PMs Resignation

This week, Japanese Prime Minister Shinzo Abe resigned due to ill health, pushing stocks down while giving the Japanese Yen (JPY) a boost, as it is considered a safe haven asset within the country.

It's difficult to forecast how things will play out at this point, as it will ultimately come down to how investors perceive Abe's replacement and how quickly the country is able to recover from the coronavirus pandemic.

However, it is almost certain that interest rates will continue to be negative in Japan for the foreseeable future.

A Quick Summary

  • The US Dollar has taken a hit and depreciated against many of its currency rivals following heightened investor concerns that high levels of inflation in the US over the coming months will hurt their returns.
  • Other factors, such as progress made towards creating a COVID-19 vaccine, are also dragging on the performance of the Greenback.
  • US stocks had a strong end to the week, and equities investors will be hoping a strong bull run is on the cards.
  • Contrastingly, investors who are “long” on the US Dollar will be hoping for a bear run, as the stock market and the Greenback have negatively correlated over the course of the COVID-19 pandemic.
  • Meanwhile, in Japan, the resignation of Prime Minister Shinzo Abe caused stock markets to shed millions of dollars, while the Japanese Yen gained as it is considered a good safe-haven investment in such times of political and economic uncertainty.
  • It's difficult to predict how things will play out in Japan in the medium to long term, but regardless of the economic outlook, interest rates are likely to remain negative for a while.