USD/JPY rose for a sixth straight day and has gained on seven of the past eight days, reaching a two-and-a-half-week high in Asia on Monday. It moved above 159.00, supported by a firmer US Dollar.
The US Dollar Index hit its highest level since 7 April as US-Iran tensions increased and markets leaned towards tighter Federal Reserve policy. Donald Trump told Iran the “clock is ticking” and there “won’t be anything left” if action is not taken soon, adding that “time is of the essence”.
The Times of Israel reported on Saturday that Israel and the US are advancing military preparations to potentially resume coordinated attacks against Iran. This supported demand for the US Dollar as a reserve currency.
Oil prices rose to a two-week high as the US-Iran standoff continued alongside the effective closure of the Strait of Hormuz. This raised concerns about higher energy costs feeding inflation and affecting Fed policy.
CME Group’s FedWatch Tool shows traders pricing in over a 50% chance of a Fed rate rise by the end of this year. Higher US Treasury yields added support for the US Dollar and USD/JPY.
The Japanese Yen weakened on worries about economic risks linked to the Middle East conflict. Speculation about Japanese currency intervention limited further Yen declines and tempered upside in USD/JPY.
We remember watching the dollar’s strength against the yen build throughout 2025, largely due to a firm Federal Reserve and persistent geopolitical risks. Now, with the Fed Funds Rate holding steady at 5.50% and March’s core inflation data showing a stubborn 3.8% annual increase, the fundamental reasons for dollar dominance remain firmly in place. This environment continues to support the high US Treasury yields that attract capital away from Japan.
As we saw last year when the USD/JPY pair flirted with the 160 level, the threat of intervention from Japanese authorities is very real, creating a potential cap on further gains. We saw this play out with sharp pullbacks following suspected interventions in April and May of 2024 when the currency weakened past 155. Therefore, traders should consider buying put options on USD/JPY as a hedge or to position for a sudden reversal if the pair pushes toward those historic highs again.
The underlying tension in the Middle East, while fluctuating, still keeps a floor under energy prices, with WTI crude currently trading over $80 a barrel. This persistent inflationary pressure creates uncertainty around the Fed’s future path, which increases market volatility. This makes long volatility strategies, such as purchasing straddles on currency ETFs, a viable way to trade the potential for large price swings in the coming weeks.
The significant interest rate differential between the US and Japan continues to be the dominant theme, just as it was in 2025. With the US 10-year yield near 4.5% while the Japanese equivalent sits around 1%, the carry trade remains profitable. To manage the risk of a sudden yen strengthening, traders can use currency futures options to protect their long USD positions against sharp, unexpected moves.
