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Forming factors of Yen (japanese currency) exchange rate

In spite of a sharp monthly reversal, the matched trend lows of 87.15 from the months of December as well as January, the Forex market has been confined to an important downward trend while the current rebound has been classed as corrective. As was witnessed in the Forex market, a daily double bottom has been initiated, and it is hopeful that the Japanese yen will climb back to the 104.00 area.

Interest Rate Forecast of Japanese Yen and US Dollar Interest Rate

The pair of currencies which consist of the US Dollar/Japanese Yen seems to be literally unaffected by the interest rates between the Bank of Japan and the Federal Reserve. The risk manifestation has driven the price action for the Japanese Yen and US Dollar with risk sentiment favoring the Yen. The relationship between these two currencies disappeared in February once the USD/JPY rallied in spite of a large sell off in equity markets all across the world.

The Credit Suisse made some expectations about the Japanese Yen over the next year. The one good thing about all of this is that the Bank of Japan has always kept rates near zero. The Fed funds rate is expected to rise by 41 bps. Therefore, the Japanese Yen could resume its position as one of the funding currencies which may also add to the Yen's weakness going forward.

The Valuation of the Japanese Yen and the US Dollar

The Japanese Yen continues to remain overvalued against the $US dollar even after the Yen posted an 8.32% loss during February especially when the USDJPY is more than likely to push higher even as the economic downturn in Japan's economy intensifies. The grim outlook for further growth has battered the correlation between the Yen as well as the stock markets.

Purchasing Power Parity

Purchasing Power Parity happens to be one of the oldest as well as the most basic fundamental approach in determining the "fair" exchange rate of one currency to another. The definition states that an identical product should cost approximately the same when trading the Japanese Yen from one country to another. The only difference lies in the price tag which can be accounted for by the rate of exchange. If you find that a pencil has a price tag of ?1 in Europe and the same pencil costs $1.20 in the United States, the fair exchange rate should equal 1.20. These values are compared to the current Forex market rates to determine exactly how much a currency is under- or over-valued against the United States dollar.

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