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Three Reasons Why the Dollar Kicks the Yen's Butt

In the red corner, wearing white trunks with red polka dots, from the Land of the Rising Sun, the Japanese yen! And in the blue corner, with the red, white, and blue stars and stripes, the pound-for-pound king of North America, the US dollar! Let's get ready to rumbleeeeee...

Round 1: Economic Data

Unlike Japan, the US has been churning out upbeat economic reports every now and then. Recall that the US printed out a positive payrolls figure for March, keeping its unemployment rate steady at 9.7%, while Japan's jobless rate actually increased from 4.9% to 5.0% in the same month. A few days from now, the US is set to show another improvement in their labor market and post a 197,000 net increase in hiring for April.

Looking at the business sectors of Japan and the US, it seems like Uncle Sam has the upper hand as well. Both the manufacturing and non-manufacturing purchasing managers' indices, as reported by the US Institute of Supply Management, have managed to reflect stronger growth in the past few months. On the other hand, Japan's Tankan survey results have still shown worsening conditions in their manufacturing and services sectors for the first quarter of 2010.

Aside from that, the US consumer sector is looking much healthier than Japan's. Compared to the 1.6% increase in US retail sales seen last March, Japan's 0.8% uptick in spending looks feeble... And yet they boast that it's the fastest pace of retail sales growth in more than a decade! C'mon Japan, is that all you got?!

Round 2: Possibility of Rate Hikes

Another reason why the USD kicks the JPY's butt is their central bank's respective interest rates. Isn't the Fed's rate (0.25%) just a hairline above the Bank of Japan's (0.10%)? Yes, yes, I hear you... but the outlook for a rate hike by the Fed looks much MUCH more likely. The chances of a rate increase by the BOJ? Something like 0.000001%. Ok you got me, I'm exaggerating... Or am I?

The last time the BOJ's rate was above 0.10% was way back in 2008, when it stood at 0.50%. And the last time they actually hiked rates? That was over 3 years ago! Nobody expects the BOJ to raise rates and for good reason. As I've pointed out in one of my past entries, Japan has its hands full with a deflation teriyakidon. Raising interest rates would just make matters worse by limiting potential price growth.

Meanwhile, even though the Fed has repeatedly said that they will keep rates at current levels for an "extended period," you should know that it's really Ben Bernanke's who's pushing for this. Other Fed members like Thomas Hoenig have been pushing for a rate hike, fearing that inflation may get out of hand.

With the recent US inflation reports showing that price levels rose slightly faster than expected, I wouldn't be surprised if the Fed suddenly drops the "extended period" phrase in their next statement, just like how Terence Howard wasn't included in Ironman 2.

Round 3: World Reserves

Will the real safe-haven currency please stand up? Please stand up?

Here's the skinny.... The US dollar is currently perceived to be the safest currency in the market because, as we all know, it is the world's reserve currency. A large portion of most, if not all, foreign exchange reserves of major economies are denominated in US dollars. Let's face it folks, the US dollar's domain is the most liquid and the deepest market, earning its right as the world's safe-haven currency. Check this out!

PoD Chart

Yep, that's right. The Japanese yen makes up a measly 3% while the dollar takes up a ginormous 62% of the world's reserves. The only reason why the yen gains during times of risk aversion is the unwinding of carry trades and not because traders see it as a safe-haven.

With all these debt contagion fears haunting the markets, we could see both the dollar and the yen rise. But if you ask me, the dollar is ahead on points in my scorecard. So the winner of the USDJPY match, by unanimous decision (according to the committee of one - that's me!), is the US dollar!