Stronger US Dollar and safe-haven outflows push Japanese Yen lower

• With Fed rates left unchanged despite two dissenting votes for a 25-bps rise, USD/JPY regains ground.
• Market sentiment draws support from robust AI sector earnings and Fed Chair Warsh's resolve on inflation.
• Despite the approaching BoJ policy decisions, the Japanese Yen comes under pressure as bond yields rise and funds leave safe havens.

The Federal Reserve (Fed) has left interest rates unchanged, although two policymakers voted instead for a 25-basis-point rise. Against this backdrop, USD/JPY is reversing the previous day's losses, trading near 158.00 in Thursday's Asian session as the US Dollar (USD) also recovers from its decline a day earlier.

Speaking after the decision, Fed Chair Kevin Warsh stressed the economy's continued strength while reiterating the Federal Open Market Committee's commitment to price stability and its 2% inflation target. Turning to the future monetary policy calendar, he said eight Fed meetings were scheduled for next year, one of them without a vote. He also indicated that he expects six policy-setting meetings in 2028.

Outflows from safe havens are adding to pressure on the Japanese Yen (JPY), as government bonds decline and enthusiasm for artificial intelligence improves market sentiment. Reinforcing optimism about the AI sector, South Korean chipmaker SK Hynix posted strong third-quarter results and unveiled higher shareholder returns, supported by AI-driven profits.

Attention is now shifting to Friday's Bank of Japan policy meeting. Although the broad expectation is for interest rates to stay on hold, persistent inflationary pressures may prompt officials to hint at a possible rate increase in December.

Rabobank strategists point to the Japanese Yen's stronger performance among G10 currencies, observing that “the JPY is the second best performing G10 currency in the half year to date after the NOK” and “the fourth best performing G10 currency in the year to date.” Nevertheless, they warn that “significant amounts of FX intervention in favour of the JPY have been a notable factor in supporting it this year,” highlighting how much the currency's recent resilience owes to official intervention.