The dollar strengthened against the yen due to the political situation in Japan and trade talks

The dollar remained strong against the Japanese yen (USD/JPY) in Asian trading on Tuesday, trading around 147.55. The yen weakened further due to political turmoil in Japan and the uncertain outlook for fiscal policy. The dollar benefited from safe-haven demand and expectations of economic stability, attracting investors to buy.

Shigeru Ishiba, Japan's prime minister, has vowed to stay in office despite the ruling Liberal Democratic Party expected to lose its majority in upper house elections on Sunday, in a political turmoil that has heightened market concerns about the direction of fiscal policy and further weighed on the yen.

"The results of the upper house election were largely within market expectations, with investors more focused on the upcoming Japan-US trade talks." - Invesco analyst David Chao

Japan-US trade talks enter a critical period, with the August agreement in focus

Japan's chief tariff negotiator, Ryoshasa Akasawa, said on Monday that he hoped to reach some form of trade deal with the US by August 1, as he kept pressure on the yen if talks failed to make substantive progress or raised concerns about further tensions in bilateral trade relations.AihuaAnalysts point out that the progress of trade negotiations will have a significant impact on exchange rate movements.

The Federal Reserve is turning dove, the dollar's rally is limited

Despite the dollar's short-term strength against the yen, the Fed's increasingly dovish monetary policy could weigh on the dollar in the medium term. Fed Governor Christopher Waller pointed out that while the overall job market remains solid, private sector job growth is weak, supporting expectations of a rate cut in July.

"We should not wait for the job market to deteriorate across the board before taking action." - Christopher Waller, governor of the Federal Reserve

According to the CME FedWatch tool, the current market bet on the probability of the Federal Reserve cutting interest rates in September has reached 59%, indicating that investors are generally cautious about future economic growth.

Editorial opinion:

The current trend of the dollar-yen exchange rate is mainly driven by two variables: one is the domestic political situation in Japan and the direction of its fiscal policy, and the other is the adjustment of the Federal Reserve's policy attitude.

From a technical point of view, the dollar is testing the possibility of breaking through the 148.00 mark against the yen. If the Japan-US trade talks are delayed and Japan's fiscal policy continues to be vague, it may further push up the exchange rate. However, if the Federal Reserve actually starts to cut interest rates in July or September, the dollar's action may be limited, and the USD/JPY may return to below 145.00. Investors can pay attention to the real-time market analysis provided by the Aihua platform to grasp market dynamics.