The yen could come under fresh selling pressure in the weeks ahead.

Until recently, the dollar’s topside was capped by Japanese institutional investors’ sales to repatriate money from markets overseas, but no longer. They now appear to have switched back to foreign securities.

Foreign hedge funds have reactivated their carry trade, where they borrow yen in Japan at low interest rates and convert them to dollars at higher rates elsewhere.

Given Japan’s ultralow interest rates and the volatility of its bourses, it is natural for investors to switch away from Japanese financial markets.

What’s more, political uncertainty continues and worries remain over a delay in structural reforms in Japan.

Gloom deepened over economic prospects Monday when the Bank of Japan’s quarterly “tankan” survey showed a sharp fall in business sentiment.

Unless encouraging signs emerge, few will be willing to buy yen.

The yen will remain under selling pressure until the market is convinced that Japan has a more stable political footing and that a new prime minister is providing focused leadership over economic restructuring programs.

The market is trying to ascertain if a U.S. economic recovery will emerge this summer or shortly after, which will help brighten prospects for the Japanese economy and, hence, the yen as well.

On the other hand, a bearish scenario for the dollar will arise if the U.S. economic slowdown turns out to be steeper than expected.

A U.S. industry survey has shown that manufacturing has continued to weaken in recent months.

The Chicago-based National Association of Purchasing Management’s monthly index showed that manufacturing activity fell for the eighth month in a row in March.

That is the index’s lowest level since 1982.

The euro could also remain under downward pressure relative to the dollar amid concern over the negative impact of the U.S. economic slowdown on the euro zone.

With Europe facing a spread of foot-and-mouth disease and signs of economic weakness, the European Central Bank appears to have little choice but to lower interest rates.

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