• USD/JPY advances as renewed US-Iran tensions fuel demand for the US Dollar.
• Rising Oil prices weigh on the Yen amid Japan's heavy dependence on Middle East energy imports.
• Markets await the FOMC minutes for fresh clues on the Federal Reserve's interest rate path.

USD/JPY edges higher on Wednesday as renewed escalation in the Middle East boosts demand for the US Dollar (USD) and lifts Oil prices, weighing on the Japanese Yen (JPY). At the time of writing, the pair is trading around 162.50, close to 40-year highs.

The United States and Iran exchanged fire overnight following attacks on commercial ships near the Strait of Hormuz earlier this week. On Wednesday, US President Donald Trump declared that the ceasefire deal with Iran was "over" and said dealing with Tehran was "a waste of time" while speaking at the NATO Summit in Ankara, Turkey.

The latest escalation has dampened hopes for a near-term peace deal, reigniting concerns over potential disruption to global Oil flows through the critical waterway, where shipping had been gradually improving since last month's interim peace agreement.

The rebound in Oil prices has revived inflation concerns, increasing pressure on major central banks to tighten monetary policy. At the same time, higher energy prices are particularly negative for the Japanese Yen, as Japan imports nearly 90% of its crude Oil from the Middle East.

However, with speculation growing that Japanese authorities could intervene to support the Yen, traders remain cautious about aggressively chasing further gains in USD/JPY.

On the monetary policy front, traders have increased bets that the Federal Reserve (Fed) could raise interest rates in September, with markets pricing in roughly a 68% probability of a hike, according to the CME FedWatch Tool. Investors now await the release of the June Federal Open Market Committee (FOMC) meeting minutes at 18:00 GMT for fresh clues on the Fed's policy outlook.

In Japan, the Bank of Japan (BoJ) continues to signal a tightening bias. Earlier this month, BoJ Governor Kazuo Ueda said, "Japan is currently in a situation in which the secondary spillover effects of inflation stemming from higher crude oil prices are more likely to lead to an overshoot of underlying inflation. We believe it's necessary to make decisions on future policy based on this premise."

Japan's deteriorating fiscal outlook could temper the pace of the BoJ's policy normalization. However, the government sought to reassure markets on Tuesday by reaffirming the central bank's independence. "There is no change to the government's stance that specific monetary policy means fall under the jurisdiction of the BOJ," Economic and Fiscal Policy Minister Minoru Kiuchi said at a press conference.