The impact of the interest rate differential is limited. But QEP has fueled Yen outflows to the U.S., which drove the Yen exchange rate down. So the Yen will likely recover further when the BOJ stops forcing money into the economy, the outlook for the domestic economy improves, and domestic credit demand keeps rising. Actually, the stronger Yen might be one reason to delay the end of QEP, if the Yen goes beyond 108 to the Dollar already early this spring. In this case the BOJ might want to delay monetary tightening to counter-balance the exchange rate impact on exporters and deflation.

Governments in Asia are already complaining about the weaker Dollar of course, but they will rather focus on ending their interest rate increases than on starting a major intervention cycle. This is because they are expecting a slower U.S. economy anyway, try to push domestic demand, and could gain from lower material input prices. The key is U.S. policy however, when domestic demand slows, U.S. companies will become more interested in exporting and investing abroad. So the U.S. government might want to talk the Dollar down more readily. I think we already see the beginning of such a trend.

China continues to focus on domestic demand and has an increasing problem to manage its vast currency reserves. In the current situation, with a declining Dollar but not much Yuan speculation, the government might therefore want to do another currency step.