- Trump-Kim summit drives USDJPY higher as geopolitical risk fades.

- Yet positioning prior to June Federal Reserve meeting also at play.

- But USDJPY is set to decline over the medium term says J.P. Morgan.

© Shealah Craighead, The White House

The Dollar strengthened against the safe-haven Yen Tuesday after talks between North Korean and US leaders yielded a commitment to de-nuclearization of the Korean peninsula, which has reduced geopolitical risks, but strategists at J.P. Morgan say the greenback's days are numbered.

USD/JPY rose from 110.00 late on Monday to 110.30 during the early hours of Tuesday morning as it became apparent the summit between President Donald Trump and North Korea's Kim Jong-Un went off without a hitch and would lead to a declaration of intent around denuclearisation.

Positioning ahead of the June Federal Reserve meeting, which is expected to yield a second 2018 interest rate rise on Wednesday, may also have been at play Tuesday. However, according to strategists at J.P. Morgan, the robust condition of the US and global economies mean the Dollar will soon succumb to renewed weakness against the Japanese Yen.

"The broad narrative for the USD is stubbornly unchanged –synchronized above-trend growth across the globe will drive early-cycle policy normalization and currency strength versus the dollar, which will modestly grind lower under a widening discount," says Daniel Hui, an FX strategist at JP Morgan.

The Dollar is locked in a war of attrition with its international rivals that the US unit will not be able to win, despite that economic growth in the US is comparatively greater than that elsewhere in the world.

This is because faster US economic growth will fuel the expansion of the global economy, leading other central banks to raise their interest rates, placing pressure on the Dollar. Hui sees this grinding the Dollar Index lower over the coming year, from 93.51 Tuesday to 89.3 by June 2019.

And what of the Yen? The main risk to the currency is political in nature and to the upside in trajectory. Shaken by a recent school funding scandal, Prime Minister Shinzo Abe is in peril and a leadership challenge cannot be ruled out during the weeks ahead.

Such a move could lead to specualtion of an end to Abenomics, or the 'easy money' monetary policies that have kept the Japanese currency under relentless pressure since the end of 2012, which would be positive for the Yen as it would augur expectations of higher interest rates further down the line. Yet these gains are not expected to endure for very long either.

"Once a strong candidate to challenge PM Abe emerges, JPY is likely to react with appreciation on speculation that Abenomics will end. Nevertheless, even if PM Abe is replaced as the head of the LDP, and consequently as PM, we are unlikely to see a significant change in current economic policy as long as the LDP stays in power. Hence, this should not result in a long-term appreciation trend of JPY," says Tohru Sasaki, another strategist at J.P. Morgan.

Sasaki forecasts the USD/JPY pair to decline modestly over the coming months, falling from 110 Tuesday to 108 before the end of September and 106 by the time the year is out and 104 before the end of March 2019. The exchange rate is then forecast to recover back toward the 106 level ahead of June 2019.

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