US Inflation Data Help Dollar Conquer Japanese Yen

The latest US inflation data confirms how future the Fed's policy will be far more hawkish than the Japanese central bank (BoJ), thus driving the USD/JPY rally.

The US dollar rocketed around 0.5 percent to the 116.70s range versus the Japanese yen in today's trading (11/March), while scoring its highest record since January 2017. The greenback was boosted by the publication of the latest US inflation data which emphasized how the Fed's future policy will be far more hawkish than the Japanese central bank (BoJ).

USD/JPY Daily chart via TradingView

Yesterday's US consumer price index report showed growth of 7.9 percent (Year-on-Year) for the period February 2022. This figure represents the fastest increase in annual inflation in the last 40 years, even though it does not include all the effects of the outbreak of the Russo-Ukrainian war.

As is well known, the Russian-Ukrainian war has resulted in an increase in the prices of various vital commodities. Meanwhile, US President Joe Biden's recent instructions to block shipments of goods from Russia have the potential to further increase the prices of energy, agriculture and a range of other commodities for consumers based in Uncle Sam's country.

For central banks, higher inflation expectations increase the urgency of monetary policy tightening. The prospect of the Fed increasing interest rates is even more convincing. On the other hand, Japan's inflation rate is still far from the target and is unable to urge the BoJ to change its dovish stance.

"The dollar-yen appears to be a yield play (rate expectations -ed). I think the contrast between the BoJ holding on and the Fed preparing to raise rates is very tempting (to traders)," said Sean Callow, senior strategist at Westpac, as reported by Reuters.

While the USD/JPY exchange rate soared to a five-year high, the US dollar index (DXY) now tends to consolidate in the 98.50s range due to the stabilization of the EUR/USD exchange rate. Market participants seem to be comparing the impact strength of the more hawkish attitude of the ECB with the risk of a war between Russia and Ukraine for the European continent. Dialogue between the Russian Foreign Minister and the Ukrainian Foreign Minister yesterday in Turkey failed to reach an agreement regarding a ceasefire, even though the fighting had entered its third week.