Japanese Yen moves away from three-week top as tenuous US-Iran ceasefire benefits USD

USD/JPY regains positive traction following the overnight fall to a nearly three-week low.
The fragile US-Iran ceasefire helps revive the USD demand and lend support to spot prices.
Economic concerns stemming from Middle East conflicts weigh on the JPY and favor bulls.

Haresh Menghani FXStreet

The USD/JPY pair builds on the previous day's modest bounce from sub-158.00 levels, or a nearly three-week low, and gains some positive traction during the Asian session on Thursday. Spot prices climb back closer to the 159.00 mark in the last hour and draw support from a combination of factors.

Investors turned skeptical about the durability of a fragile US-Iran ceasefire after Israel launched its largest assault on Lebanon. Adding to this, Iran reportedly is considering the possibility of withdrawing from the ceasefire agreement following what it said was an Israeli ceasefire violation in Lebanon. This keeps a lid on the optimism and benefits the US Dollar's (USD) global reserve currency status, which, in turn, acts as a tailwind for the USD/JPY pair.

Meanwhile, Iran’s Islamic Revolutionary Guard Corps (IRGC) claimed that shipping through the critical Strait of Hormuz was halted minutes after Israel's large-scale attack on Lebanon. Given Japan's dependence on oil imports from the Middle East, the latest developments revive concerns that the economy will come under substantial strain in the foreseeable future. This further undermines the Japanese Yen (JPY) and lends additional support to the USD/JPY pair.

The USD bulls, however, seem hesitant on the back of the US Federal Reserve's (Fed) dovish outlook. In fact, Minutes of the March FOMC meeting released on Wednesday showed that the central bank still sees interest rate cuts in the future if inflation were to decline in line with expectations. This, in turn, could limit any further appreciation for the USD/JPY pair as traders now look forward to the crucial US inflation data for some meaningful impetus.

The US Personal Consumption Expenditures (PCE) Price Index is due later during the North American session. The focus will then shift to the US Consumer Price Index (CPI) report on Friday, which will play a key role in influencing market expectations about the Fed's policy outlook and drive the USD demand. Apart from this, geopolitical headlines should contribute to infusing volatility in the global financial markets and around the USD/JPY pair.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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