Why JPY Falls after raising Interest Rate

Quite a number of friends ask me why the Japanese Yen falls after Japan decides to increase its interest rates? Let me break it down for you:

So, Japan decides to hike up its interest rates, right? But then, the very next day, the Swiss National Bank goes and announces that they're lowering their interest rates. And to add to the mix, the UK comes along and says that their Consumer Price Index (CPI) isn't as high as everyone thought it would be.

Now, when all this happens, people start thinking that the US Dollar is going to be stronger compared to the currencies in Europe. They figure Europe might lower its interest rates sooner than the US does. So, what do they do? They start grabbing up US Dollars, making US Dollar to move stronger than all the currencies.

Also, before Japan officially announces the interest rate hike, the market already expects it to happen. Higher inflation and salary increase already push Japanese Yen higher. So, the Yen had already adjusted for it. When the news finally hits, traders are taking profit.

Hope that clears things up a bit for you!

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