MUFG’s Head of Research Derek Halpenny notes the US Dollar has extended gains as markets focus on potential US military action against Iran. He highlights that USD/JPY historically rallied into similar events, but improved JGB sentiment and stable Japanese yields may limit further Japanese Yen weakness.

Iran risk and Japan policy backdrop

"The US dollar has gained modestly further with the focus on the risk of an imminent attack on Iran by the US as the build-up of military presence in the region continues."

"The build-up to when the US attacked Iran last year (22nd June) saw crude oil surged nearly 20% in the eight trading days before and the dollar advanced by a little over 1.0%."

"The move isn’t yet that big in crude oil but similar in FX and with the positioning of late in FX, we could certainly see a scenario of further near-term gains."

"USD/JPY specifically saw a larger move back then – in particular on the Monday in response to the attack and USD/JPY had advanced by about 3.5% in the eight-day period into the attack."

"Still, JGB market stability can help contain any selling of the yen in response to geopolitical risks increasing."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)