Yen Recovers From 6-Month Low, As Safe Haven Demand Rises

The yen strengthened for a second day against the U.S. dollar on Wednesday, as global stock markets declined and investors looked to the Japanese currency as a haven. Earlier in the week the yen had weakened after Japan's third quarter GDP was revised lower.

BOJ Stimulus

In April 2013, the Bank of Japan announced their large-scale bond-buying program, aiming to stimulate the Japanese economy and prevent deflation. The program weakened the yen initially. However, the Japanese currency stabilized, as concerns over military intervention in Syria and the U.S. debt crisis caused investors to move to the yen as a safe haven.

Last month, however, the Yen weakened again substantially -- after Bank of Japan Governor Haruhiko Kuroda reaffirmed the central bank's commitment to accommodative monetary policy, in order to reach its two percent inflation target.

U.S. Budget Deal

In Washington on Tuesday, a provisional budget deal was reached -- to avoid a repeat of October's government shutdown. While the deal reassured investors, it may have increased the probability the Federal Reserve will begin to taper its $85-billion-a-month stimulus program in the near future. A reduction of the Federal Reserve’s stimulus program, which debases the U.S. currency, would likely be bullish for the greenback. However, a modest taper may have already been priced in.

December FOMC Meeting

The Federal Open Market Committee meeting is scheduled for next week, on Dec. 17-18. Rhetoric from Fed presidents Bullard and Fischer earlier in the week raised expectations for a modest reduction of stimulus in the near term.

On Monday, in a speech to the CFA Society of St. Louis, Federal Reserve Bank of St. Louis President James Bullard said a small taper "might recognize labor-market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014.”

The more hawkish Dallas Fed President Richard Fisher said in a speech in Chicago on Monday, “We at the Fed should begin tapering back our bond purchases at the earliest opportunity.”

USD/JPY Daily Chart
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BY Dan Blystone