Japan’s Accommodative Monetary Policy and China’s Economic Revival Impact Global Currency Trends

A surging yen steadied on Monday as Japan’s incoming Prime Minister, Shigeru Ishiba, signaled that monetary policy should remain accommodative. Meanwhile, commodity currencies rose to year highs as investors hoped for a turnaround in China’s economy.

Japan’s yen jumped on Friday after Ishiba, a former defense minister and critic of aggressive monetary policy, won the leadership of the ruling Liberal Democratic Party. With control of parliament, Ishiba is set to take office soon. The yen reached a one-week high of 141.75 in the Asian session, but further gains were limited after Ishiba told NHK that policy must remain accommodative due to Japan’s economic conditions.

Analysts believe Ishiba’s comments slowed the yen’s rise. Additionally, the possibility of a snap election, which Ishiba hinted at, may further pressure the yen in the short term. Ray Attrill, head of foreign exchange strategy at National Australia Bank, said that a potential election could keep the Bank of Japan out of the picture until December, a minor negative for the yen.

Elsewhere, the euro remained stable at $1.1167, and sterling traded at $1.3391. Markets are now focused on U.S. jobs data due on Friday, which could influence the pace of U.S. interest rate cuts. European inflation data set to be released on Tuesday is also being closely watched.

Commodity currencies, including the Australian and New Zealand dollars, hit new highs for 2024. Optimism over China’s economy, driven by rate cuts and fiscal support expectations, pushed the Australian dollar up by 0.5% to a 20-month high of $0.6941, while the New Zealand dollar rose by 0.5% to a 14-and-a-half-month high of $0.6375.

Last week, the U.S. Federal Reserve’s favored inflation measure showed inflation at 2.2% for the year ending in August, leading to lower U.S. yields and a drop in the dollar. Joe Capurso, strategist at Commonwealth Bank of Australia, suggested that the dollar is likely to decline over the next year due to controlled inflation and falling interest rates, which could boost the global economic outlook and support commodity currencies.

China’s stimulus measures helped boost the yuan last week, with the currency breaking the 7-per-dollar level in offshore trading. The yuan remained near 7.0129 in onshore trading on Monday. Chinese stocks also saw strong gains, marking their best week in a decade.

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