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Forex pairs in this Article » USD/JPY (London) - USD/JPY has extended last week’s yen gains on bets that the Japanese currency has been over-sold. USD/JPY has fallen to JPY104.3455 after last week recording five-year highs at JPY105.4415.

Diverging monetary expectations

The dollar had rallied to its strongest position against the yen since 2008 on diverging monetary policy expectations between the US Federal Reserve and the Bank of Japan. On 18 December, the US Federal Reserve announced that it would be tapering its monthly asset purchase programme by USD10bn, leaving purchases at USD75bn, citing an improving US economic outlook. By contrast, the BoJ continues to aggressively target 2 percent inflation in an effort to break out of a deflationary slump, buying up JPY7 trillion of bonds a month. The recent run of yen weakness will have helped push towards this target, importing inflation through more expensive domestic prices.

It is expected that data released today will show a continued strengthening of the US economic outlook. Consensus expectations are for a rise in the US ISM non-manufacturing index from 53.9 to 54.6 in December. It is also expected that November US factory orders rose 1.7 percent, recouping 0.9 percent falls in October. A confirmation of this improving US data could reverse some of the dollar declines driven by yen overselling concerns as well as a squaring of positions by Japanese investors, repatriating some capital.

USD/JPY declines

USD/JPY fell 0.5 percent overnight to JPY104.3455 after a high of USD104.9600. The pair opened the session at JPY104.8600 before declining and bouncing off resistance at USD104.1555.
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