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USD regains upward momentum over past week - BTMU

FXStreet (Łódź) - Lee Hardman, FX Analyst at the Bank of Tokyo Mitsubishi UFJ notes that the USD started strengthening again last week, which became most evident in USD/JPY following the BoJ's announcement of further easing on Friday.

Key Quotes

"The US dollar has regained upward momentum over the past week with the dollar index moving closer to the intra-day high of 88.71 from the 7th June 2010. The US dollar has derived support from both a rebound in short-term US yields and further monetary easing overseas which has re-widened investor expectations for policy divergence with the Fed."

"The two-year US government bond yield has rebounded back above 0.5% after hitting an intra-day low of just 0.24% on the 15th October. Renewed US dollar upward momentum over the past week has been most evident against the yen after the BoJ decided to accelerate already very aggressive monetary easing."

"The announcement from the BoJ has reinforced investor confidence in Abenomics as evident by further Japanese equity market strength and yen weakness. The Nikkei 225 index has extended its initial gains following the BoJ’s announcement to just over 6.0% reaching its highest level since October 2007, and extending gains since late 2012 to just under 100%."

"The yen has also extended its decline against the US dollar since late 2012 to just over 30%, with USD/JPY reaching its highest level since December 2007. In the process the yen has gone from being significantly overvalued to significantly undervalued According to our long-term purchasing power parity valuation estimate, USD/JPY is now over 20% overvalued which is similar in scale to the last four peaks dating back to the early 1990’s."

"We still expect the yen to weaken further against the US dollar driven mainly by the unprecedented scale of BoJ monetary easing, although remain cautious over the scope for further USD/JPY upside given that the yen is already significantly undervalued which may help dampen further weakness."

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