Japanese Yen slides to 159.00 vs weaker USD amid economic risks due to Mideast uncertainty

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The USD/JPY pair attracts some dip-buyers following a bearish gap opening on Monday and reclaims the 159.00 mark during the early part of the European session.

USD/JPY recovers around 30 pips from the daily low and fills a major part of the bearish gap opening.
Economic concerns due to Hormuz risks continue to undermine the JPY amid mixed Iran peace signals.
Geopolitical uncertainties and rising Fed rate hike bets help limit USD losses, also supporting the pair.

The USD/JPY pair attracts some dip-buyers following a bearish gap opening on Monday and reclaims the 159.00 mark during the early part of the European session. Moreover, spot prices remain well within striking distance of a three-week high, touched last Thursday, and seem poised to appreciate further amid mixed signals over a potential US-Iran peace deal.

Developments over the weekend fuel hopes for a potential deal to end a nearly three-month-long Iran war and boost investors' confidence, undermining the US Dollar's (USD) reserve currency status. However, the US and Iran remained at odds over key issues, including blockades on the Strait of Hormuz and Tehran's nuclear program. US President Donald Trump said on Sunday that he had told his representatives not to rush into any deal with Iran. This keeps geopolitical risks in play and caps the market enthusiasm.

Furthermore, traders have nearly fully priced in at least one 25 basis points (bps) interest rate hike by the US Federal Reserve (Fed) in early 2027, which helps limit deeper USD losses. Meanwhile, investors remain worried about economic risks stemming from the continued disruption of energy supplies. This, in turn, undermines the Japanese Yen (JPY) and contributes to the USD/JPY pair's intraday bounce of around 30 pips. However, intervention speculations might hold back the JPY bears from placing aggressive bets.

Meanwhile, the liquidity is likely to remain low on the back of holidays in the US and several key markets in Europe. This also warrants some caution before positioning for any further appreciating move for the USD/JPY pair. However, the fundamental backdrop, along with the emergence of some intraday dip-buyers, suggests that the path of least resistance for spot prices remains to the upside.

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.