Type: Currency | Group: Majors | Base: US Dollar | Quote: Japanese Yen | Spread: 0.6 – 3.6 pips
The U.S. dollar Japanese yen (USD JPY) is a currency pairing whereby the U.S. dollar and the Japanese yen can be traded against each other. The USD JPY can be thought of as the dollar versus the yen – you short the dollar and go long the yen or short the yen and go long the dollar. The USD JPY is among the most traded currency pairs. The USD JPY may also be written as USD/JPY.
The USD JPY represented the world’s two largest economies until China surpassed Japan in GDP. Although Japan is no longer number two, the USD JPY is still a very popular trade. Japan is an export driven nation with huge debts that are mostly held domestically. The U.S. is largely service and finance driven with its debt held all over the world. Since the two face very different pressures, they can can be used to set up interesting trades in response to changes in global economic activity.
About US Dollar
The USD is integral to world trade in that it belongs to the world’s largest economy and acts as the world reserve currency. Because of this unique situation, many of the standard economic rules do not seem to apply to the USD.
The U.S. government has had long periods of fiscal irresponsibility and yet the USD has not always suffered during inflationary times that would damage any other currency. This is because, as the world’s largest economy, the USD is considered a safe haven currency in times of global uncertainty. However, this rule doesn’t always hold, and the U.S. dollar does eventually pay for periods of prolonged inflation and trade deficits – it just seems to enjoy a much longer lag before any market reaction takes place.
About Japanese Yen
The Japanese yen has had a wild history since it dropped its peg to the U.S. dollar after World War II. The explosive growth of the Japanese economy from those post war years to the late 1980s saw the currency skyrocket to unsustainable highs. Since that time, the yen has stabilized despite Japan having one of the worst debt to GDP ratios in the world. Japan’s economy is unique in that the vast majority of Japanese debt is held by Japanese citizens, so there seems to be much less pressure on the currency compared to other nations with similar balance sheets.
Japan is heavily dependent on exports. The bank of Japan has a history of intervening when the value of the yen creeps too high against other major currencies – particularly the U.S. dollar (USD).
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