【Dollar/Yen exchange rate】Last week's market and this week's outlook

【Dollar/Yen Exchange Rate】Last week's market and this week's outlook

Last week, the dollar/yen exchange rate moved in a pattern of dollar selling and yen buying for the second consecutive week. On the downside for the dollar, until the 30th there was a stubborn narrow range around 109.0 yen, but on the 30th President Trump tweeted that duties would be raised by 5% on imports from Mexico from June 10 because illegal immigration has not decreased. This tariff escalation not only affecting China but also Mexico raised concerns about a global economic slowdown, causing the dollar to test lower levels, and on the 31st there were moments when it was sold down to 108.2 yen.

Meanwhile, China has announced from June 1 a tariff increase of up to 25% on imports from the United States in response to the U.S. tariff increases on Chinese products. In response, the U.S. also imposed a 25% tariff on Chinese products arriving from June 1 onward. Furthermore, on the 28th, as the U.S. has delayed tariffs on rare earths, the Chinese government hinted at export controls to the U.S., signaling that U.S.-China trade talks are becoming more confrontational.

The worsening U.S.-China trade negotiations and tariffs on Mexico have raised concerns about a global economic slowdown, causing U.S. government bond yields to fall further. Among long-term indicators, the U.S. 10-year yield and the short-term 2-year yield have fallen for four consecutive weeks due to caution about the U.S.-China trade negotiations. On the weekend of the 31st, the 2-year yield stood at 1.92%, the 5-year at 1.91%, and the 10-year at 2.13%. The inversion of the 2-year and 5-year yields persists, and yields are well below the policy rate of the next-day funds rate (FF rate) of 2.5%. The drop to 2.13% in the 10-year yield seems excessive. If the U.S.-China trade war extends with stronger U.S. tariff actions, uncertainty about the world economy and the U.S. economy’s recession risks could rise, making U.S. Treasuries more attractive.

The euro/dollar, the most heavily traded currency pair, had seen a euro-selling trend through the 30th, but with the deepening U.S.-China trade talks and President Trump’s tweet on the 30th that he would impose tariffs on imports from Mexico, the market has shifted to dollar selling and euro buying. However, over the week it remained in a narrow range of 1.1116 to 1.1215 dollars.