The dollar-yen rate remains stuck in the ¥158 range, with US real interest rates still higher than Japan's. The market's inflection point after the US midterm elections, the situation in Iran and the Bank of Japan's pace of rate hikes are in focus.
The dollar-yen rate remains stuck in the ¥158 range, with the monthly trading range limited to approximately ¥2. The recent high was ¥158.94 and the low was ¥156.99, while uncertainty surrounding the yen exchange rate continues against the backdrop of the year's intervention history. Indicators relating to the US-Japan real interest rate differential continue to show that US real interest rates exceed Japan's, maintaining the pattern of a stronger dollar. The intervention history of the government and the Bank of Japan, as well as price trends, are shaping the market backdrop.
The direction of the dollar-yen rate will diverge depending on the midterm election results. If the Democrats control both houses, expectations for fiscal expansion are likely to recede, with lower long-term interest rates and a weaker dollar expected. A divided government and uncertainty over fiscal and trade policy could also support yen buying. By contrast, if the Republicans prevail, higher long-term interest rates and a stronger dollar are likely, and the dollar-yen rate could again test the ¥160 level. These outcomes are said to depend on policy developments after the election.
Uncertainty surrounding Iran remains a factor pushing up oil prices, and higher oil prices affect the market through a stronger dollar and weaker yen. If military action resumes after the election, there is a risk of further dollar appreciation, while progress in mediation and stabilization of the strait could instead support yen appreciation through lower oil prices and lower US long-term interest rates. Oil prices were also seen falling on the 20th and 21st.
The outlook through year-end will diverge significantly depending on US and Japanese monetary policy and the midterm election results. The yen could strengthen depending on the outcome of the FOMC meeting in late October, while some expect the current standoff to continue if the Federal Reserve's prospect of further rate hikes this year and the Bank of Japan's rate-hike outlook remain intact. The course of the real interest rate differential is expected to be the most important factor by year-end.