U.S. Borrowing Costs Support Dollar Amid Japanese Rate Changes

On February 3, XS.com's Linh Tran reported that U.S. borrowing costs remain significantly higher than Japanese rates, providing ongoing support for the dollar. According to Jin10, while the Federal Reserve maintains interest rates in the 3.50% to 3.75% range, the Bank of Japan has recently exited its zero-interest policy, raising rates to a still-low 0.75%. Tran noted that this situation continues to favor arbitrage strategies, where investors borrow low-yield yen to invest in U.S. assets. However, these trades have become more sensitive to short-term market fluctuations. Despite the favorable interest rate differential for the dollar, there remains a risk of Japanese intervention to support the yen.