Japanese Yen slides further below 159.00, nearly three-week low vs USD on Mideast tensions

USD/JPY attracts buyers for the seventh straight day amid a combination of factors.
Geopolitical tensions and Fed rate hike bets assist the USD in regaining positive traction.
Economic risks undermine the JPY, offsetting Japan’s Q1 GDP and intervention fears.

Haresh Menghani FXStreet

The USD/JPY pair prolongs its uptrend for the seventh consecutive day – also marking the eighth day of a positive move in the previous nine – and advances to a nearly three-week top during the first half of the European session on Tuesday. Spot prices currently trade just above the 159.00 mark and seem to draw support from a combination of factors.

The US Dollar (USD) regains positive traction following the previous day's modest pullback from its highest level since April 7 amid persistent geopolitical uncertainties and rising bets for an interest rate hike by the US Federal Reserve (Fed). The Japanese Yen (JPY), on the other hand, is undermined by economic concerns stemming from the Middle East conflict. The said factors counter data showing that Japan's GDP expanded at a faster than expected pace in the first quarter and act as a tailwind for the USD/JPY pair.

US President Donald Trump said on Monday that he is holding off a planned attack on Iran at the request of Qatar, Saudi Arabia, and the United Arab Emirates. Trump added that negotiations are not taking place, fueling optimism over a deal to end the Iran conflict. Investors, however, remain skeptical amid disagreements over Iran's nuclear program and the Strait of Hormuz. Adding to this, Trump has said that he has instructed the US military to remain prepared for a full-scale attack on Iran if a deal is not reached.

This keeps geopolitical risks in play and benefits the USD's reserve currency status. Meanwhile, the continued disruptions to energy supplies through the strategic waterway keep crude oil prices elevated near the monthly top, touched on Monday, fueling inflationary concerns and hawkish Fed expectations. According to the CME Group's FedWatch Tool, traders are currently pricing in a nearly 50% chance that the US central bank will deliver at least one 25 basis points (bps) interest rate hike by the end of this year.

The hawkish outlook, in turn, is seen offering additional support to the USD and backs the case for a further appreciation for the USD/JPY pair. However, speculations that Japanese authorities will step in again to prop up the domestic currency might hold back the JPY bears from placing aggressive bets and cap gains for the currency pair. Investors might also opt to wait for the release of FOMC Minutes on Wednesday for cues about the Fed's policy path, which will determine the near-term USD trajectory.

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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