As the US dollar’s dominance as a reserve currency faces rising doubts, the Japanese yen may regain appeal. Traditionally seen as a safe-haven currency, the yen benefits from Japan’s large net international investment position and its role in carry trades. However, as Wellington Management points out, its safe-haven status faded recently due to the Bank of Japan’s ultra-loose monetary policy, which widened the interest-rate gap with other major economies.
Now, as that gap narrows and the BOJ becomes the only major central bank raising rates, the yen is regaining strength. Should trade policy uncertainty ease, further rate hikes could follow, boosting the yen. “A stronger economic outlook could now be associated with a strong yen and the currency could regain its more traditional safe-haven properties,” opines Wellington.
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