The dollar has moved within a narrow range in recent days, with the results of the general election going largely unheeded.
The dollar shot up early last month on a bout of buying but soon slid back and has since traded between 104 yen and 107 yen.
There is speculation that the yen will gain ground against the dollar amid growing expectations of economic recovery in Japan. Also working in the yen’s favor are expectations of an imminent end to the Bank of Japan’s ultraeasy money policy and signs of weakness in the U.S. economy.
Still, it remains anybody’s guess whether such a bullish scenario for the yen will be played out.
When it comes to economic prospects in Japan, views are divided. Even if the BOJ abandons its “zero-interest-rate” policy, it would hardly be able to begin immediately tilting its policy toward credit tightening, which will no doubt undermine efforts to get the economy back on track.
In any event, interest rate differentials between Japan and the U.S. are not likely to narrow quickly and visibly.
The market is now trying to assess whether the U.S. Federal Reserve will succeed in its stated attempt to engineer a soft landing in which growth slows enough to keep inflation in check.
When the market confirms signs of benign inflation, the New York stock market could stage a strong rebound, helping shore up the dollar.
Judging from Japanese exporters’ growing dollar holdings, nonetheless, the dollar could continue running in excess supply, weighing heavily on its value.
Domestic institutional investors meanwhile remain in no mood to step up purchases of foreign currency-denominated securities for fear of exchange losses.
With few positive buyers in sight, the dollar’s topside would be capped by occasional bouts of selling.
Nevertheless, in the absence of positive factors to spur trading in either direction, the dollar-yen rate could remain locked within the 104-107 yen range through much of this month as well.
Emerging as focal points are a meeting of Group of Seven finance ministers in Fukuoka on Saturday and a meeting of BOJ Policy Board members set for July 17.