• USD/JPY gains as US Dollar demand strengthens.
• US-Iran conflict fuels risk aversion and lifts Oil prices.
• Higher energy costs pose risks for Japan’s economy.

USD/JPY trades higher on Tuesday as broad-based US Dollar (USD) strength weighs on the Japanese Yen (JPY). At the time of writing, the pair is hovering around 157.77, its highest level since January 23.

Escalating geopolitical tensions in the Middle East linked to the ongoing US-Iran conflict have boosted demand for the USD as a safe-haven asset. At the same time, the conflict is raising concerns about higher global inflation as fears of supply disruptions through the Strait of Hormuz have pushed Oil prices higher.

Japan, a major energy importer, is particularly vulnerable to rising Oil prices. A sharp increase in energy costs can push inflation higher and weigh on economic activity.

As global inflation fears mount, traders are reassessing the monetary policy outlook for major central banks. The Bank of Japan (BoJ) could delay further interest rate hikes. Reuters reported on Tuesday, citing three sources familiar with the central bank’s thinking, that “it has become difficult for the BOJ to raise rates” as policymakers assess the implications of the fresh geopolitical crisis for monetary policy.

Meanwhile, in the US, markets are fully pricing in the Fed to keep interest rates unchanged at the March and April meetings. The odds of a 25-basis-point rate cut in June have fallen to 28.1%, down from 42.8% a week ago, according to the CME FedWatch Tool.

Elsewhere, Japanese authorities remain alert to the Yen’s prolonged weakness. Finance Minister Satsuki Katayama said financial officials are watching markets with an “extremely strong sense of urgency.”

Looking ahead, attention now turns to key US economic data due later this week. The ADP Employment Change and ISM Services Purchasing Managers' Index (PMI) are scheduled for release on Wednesday, followed by the Nonfarm Payrolls (NFP) report and Retail Sales data on Friday.