Movements in US Treasury yields and a widening US-Japan interest rate differential affect the dollar-yen exchange rate as well as US and Japanese stocks. It is important to bear in mind that reactions can differ significantly depending on what is driving the rise in interest rates.
This article examines US Treasury yields, a key indicator of US interest rates, focusing on movements in the 2-year and 10-year yields and how they are linked to the dollar-yen exchange rate and equity markets. It explains that higher US interest rates do not automatically mean a stronger dollar and weaker stocks, as multiple factors, including economic conditions, prices, fiscal policy and supply and demand, may be involved.
The basic principle is that US Treasury prices and yields generally move in opposite directions. When the price of an already-issued government bond falls, its yield rises, and when the price rises, its yield falls. The article points out that market reactions to movements in long-term interest rates vary depending on the underlying factors.
As for the impact on the dollar-yen exchange rate, when higher US interest rates widen the US-Japan interest rate differential, dollar assets become more attractive, tending to drive yen selling and dollar buying. It also stresses that the response may differ when factors such as movements in Japanese interest rates or geopolitical risks narrow the differential.
Even when US interest rates rise, the reaction in US stocks varies depending on the backdrop. An increase in interest rates driven by economic strength can be relatively positive for stock prices, while a rise in long-term rates driven by inflation concerns or fiscal uncertainty may weigh on them. Whether additional dollar buying occurs depends on the price levels already priced into the market.