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USD/JPY Spikes Higher as Fed, BOJ Policy Divergence Widens

The Dollar/Yen is soaring early Tuesday, picking up momentum as it surged beyond the psychological 120 level after hawkish comments from the Fed and dovish remarks by the BOJ highlighted the widening divergence between their policies.

At 05:20 GMT, the USD/JPY is trading 120.371, up 0.898 or +0.75%. On Monday, the Invesco CurrencyShares Japanese Yen Trust settled at $78.49, down $0.23 or -0.29%.

Dollar Jumps as US Yields Spike on Powell’s Hawkish Remarks

The U.S. Dollar is strengthening against the Japanese Yen for a second session on Tuesday in the wake of comments from U.S. Federal Reserve Chair Jerome Powell that signaled the central bank is willing to take a more aggressive monetary policy path.

The dollar gained ground after Powell said the central bank must move “expeditiously” to bring too-high inflation under control, and will if needed, use bigger-than-usual interest rate hikes to do so.

Powell’s promise to take tough action on inflation likely means the Fed could forego the traditional quarter-percentage-point moves to more aggressive half-basis-point increases if necessary.

U.S. Treasury yields climbed after Powell’s warning about rampant inflation, making the U.S. Dollar a more attractive investment. The yield on the benchmark 10-year Treasury note rose 15.4 basis points to 2.302%. The yield on the 30-year Treasury bond moved 10.5 basis points to 2.525%.

BOJ’s Ultra-loose Policy Sinks Yen

The Bank of Japan must maintain ultra-loose monetary policy as recent cost-push inflation could hurt the economy, Governor Haruhiko Kuroda said on Tuesday, highlighting the widening gap with the U.S. Federal Reserve’s aggressive tightening plan.

Kuroda said consumer inflation is expected to accelerate as some firms pass on rising energy and food costs to households.

“Instead of leading to higher wages and corporate profits, such cost-push inflation will weigh on the economy in the long run by hurting corporate profits and households’ real income,” Kuroda told parliament.

While nominal wages may increase “quite significantly,” the rise in consumer inflation may sap households’ purchasing power by pushing down price-adjusted real wages, he added.

Given recent price developments, we need to patiently maintain our powerful monetary easing,” Kuroda said.

Short-Term Outlook

The hawkish speech from Federal Reserve Chair Jerome Powell raised bets on higher U.S. interest rates while the dovish remarks from BOJ Governor Kuroda widened the policy gap between the two central banks.

The comments from hawkish Powell and dovish Kuroda may have greenlit a rally that could take the USD/JPY to the January 29, 2016 main top at 121.678.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire