Japanese Yen strengthens as US-Iran truce headlines pressure the US Dollar.

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The Japanese Yen (JPY) strengthens against the US Dollar (USD) on Thursday, with USD/JPY snapping a five-day winning streak as the Greenback loses traction following reports that the US and Iran had reached a preliminary agreement to extend the current truce.

USD/JPY snaps a five-day winning streak as easing US-Iran tensions weaken safe-haven demand for the Greenback.
The US Dollar Index (DXY) pulls back toward the 99.00 mark after hitting a seven-week high of 99.54 earlier in the day.
Traders await Tokyo CPI, Retail Trade and labor market data due on Friday for fresh clues on the Bank of Japan’s policy outlook.

Axios reported that Washington and Tehran agreed on a 60-day memorandum of understanding (MOU), though the deal still awaits final approval from US President Donald Trump. The report, citing US officials, said shipping through the Strait of Hormuz would remain “unrestricted,” and Iran must remove all mines from the waterway within 30 days.

The headlines improved risk sentiment and weighed on safe-haven demand for the US Dollar. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 99.00 after retreating from a seven-week high near 99.54 touched earlier in the day.

Oil prices also eased somewhat following the latest developments, offering additional support to the Japanese Yen. Japan relies heavily on imported Oil from the Middle East, making the Yen vulnerable to sharp increases in energy prices.

Meanwhile, the latest US inflation data also pressured the Greenback. The core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s (Fed) preferred inflation gauge, rose 0.2% MoM in April, below market expectations and down from the 0.3% increase recorded in March. On a yearly basis, the Core PCE climbed to 3.3% from 3.2% in March, matching forecasts.

The data did little to change the current hawkish Fed narrative, with traders still pricing in the possibility of an interest rate hike later this year as elevated Oil prices keep inflation risks in focus.

St. Louis Fed President Alberto Musalem said on Thursday that “there is a scenario where the economy might require a rate increase” and warned that “if we don't see disinflation in the next 1-2 quarters, that would concern me.”

Attention now turns to a data-packed Japanese economic calendar, with Tokyo Consumer Price Index (CPI), the unemployment rate and Retail Trade data all due on Friday.

Reuters reported on Thursday that former Bank of Japan (BoJ) Deputy Governor Masazumi Wakatabe said “whether the Bank of Japan raises rates in June is not the essential issue,” adding that “what really matters is whether the economy is in a condition where the Bank of Japan can raise interest rates.”

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.