The Federal Reserve continues tightening policy, but quantitative tightening is slowing. A sharp drop in the Treasury General Account (TGA) boosted liquidity in April, followed by a reversal in May. Commercial bank reserves rose and then fell, signaling a gradual tightening in financial conditions. This change may reduce excess liquidity in markets and support the US Dollar, especially if investors expect the Fed to remain cautious on rate cuts.
Moreover, long-term US Treasury yields are rising, with the 10-year yield breaking resistance at 4.5%. A breakout could target 5.0%, widening the yield gap between the US and Japan.
This supports USD/JPY in the short term, as Japanese yields remain anchored by the Bank of Japan’s ultra-loose policy. However, if tightening US liquidity triggers market stress, investors may return to the Japanese Yen as a safe haven, limiting upside in USD/JPY.
