The dollar is strong, Japan pays a high price, the yen is in the charging line.

The USD/JPY exchange rate situation this month is that the US is strengthening while Japan is weakening, with the yen slightly under pressure.

Yesterday, USD/JPY climbed to 157.00 for the third consecutive day of sharp rise. Why did it rise so smoothly? Because US economic data is still lagging behind.

US Labor Market Still Not Crumbling

Data from the US Department of Labor released yesterday showed that initial unemployment claims were at 208,000 (for the week ending January 3), which is below market expectations of 210,000 and better than last week’s 200,000. Overall, the US labor market remains resilient and not collapsing as some feared.

The continuing unemployment benefit claims number is 1.914 million (from 1.858 million), and the four-week moving average? It decreased to 211,750 (from 219,000). This indicates the labor market is adjusting to ease some concerns.

US Trade Balance Surprised on the Positive Side

US goods and services trade deficit (for October) improved significantly, narrowing to $29.4 billion, much better than the expected $58.9 billion, and down from $48.1 billion in the previous month. This is the smallest deficit since June 2009.

Meanwhile, imports fell to their lowest level in 21 months, while exports rose to their highest historical levels, despite ongoing trade tensions. All these factors have bolstered the US dollar.

US Dollar Index (DXY) Recovers

The US dollar index, which tracks the dollar against a basket of six currencies, is currently trading at 98.85, near its highest level in the month. Coupled with rising US Treasury yields, these two factors support a stronger dollar.

The Fed Has Not Cut Rates (For Now)

CME FedWatch tool indicates an 88% probability that interest rates will hold steady at the January 27-28 meeting. However, investors still hope for two rate cuts in 2024. The upcoming non-farm payrolls (NFP) report on Friday will be a key indicator.

Where Is the Yen in All This?

While the dollar is strengthening, the Japanese yen faces pressure from two main issues:

First: China-Japan Tensions Beijing announced export restrictions on “dual-use” goods to Japan, citing national security reasons. Beijing has also begun investigating Japanese imports of dechlorosilanes (a chemical used in semiconductors). These tensions create negative sentiment for Japan’s economic outlook.

Second: Labor Data Japanese cash earnings growth (for November) increased by only 0.5% year-over-year, below expectations of 2.3%, and down 2.6% from the previous period. Japanese workers are earning less, with little strength or hope to support yen appreciation.

Summary

USD/JPY rose to 157.00 because the dollar is supported by strong US economic data (labor market holding steady, trade balance improving), while the yen is under pressure from both fundamental tensions with China and weak labor earnings. USD/JPY is likely to remain a hot topic next week, especially with the upcoming US NFP report.