Yen Weakens on Middle East Tensions

The Japanese yen weakened to around 162 per dollar on Monday, giving back the previous session’s gains as escalating tensions in the Middle East pressured the currency. The US and Iran exchanged fresh missile strikes over the weekend amid ongoing disputes over shipping through the Strait of Hormuz, driving oil prices higher and reinforcing expectations of interest-rate hikes to curb inflation. Japan’s economy and currency remain particularly vulnerable to higher oil prices due to the country’s heavy reliance on crude imports from the Middle East. The yen also faced additional pressure from a stronger dollar, which continued to attract safe-haven demand amid the geopolitical crisis. Last Friday, the yen surged after Finance Minister Satsuki Katayama said the government would encourage domestic pension funds to increase their allocations to Japanese financial assets.

The Japanese yen strengthened toward 161 per dollar on Friday, nearly reversing all of its losses from earlier in the week after Finance Minister Satsuki Katayama said the government would encourage domestic pension funds to increase their holdings of Japanese financial assets. Investors also awaited intervention data due later this month to determine whether Japanese authorities were behind the sharp but short-lived rallies in the yen seen in recent weeks. Meanwhile, traders digested data showing Japan’s producer prices rose 7.1% in June, the fastest annual increase since March 2023, reflecting persistent cost pressures from the Middle East conflict and the yen’s sharp depreciation. Oil prices also retreated after reports indicated that the US and Iran will continue peace negotiations despite a recent escalation in hostilities, providing additional support for the Japanese currency.

The Japanese yen strengthened past 161.5 per dollar on Friday, erasing all of its losses from earlier in the week as traders remained alert to the possibility of official intervention after the currency weakened to fresh 40-year lows. Market participants are now awaiting intervention data due later this month to determine whether Japanese authorities were behind the sharp but short-lived rallies seen in recent weeks. Investors also assessed data showing Japan’s producer prices climbed 7.1% in June, marking the fastest annual increase since March 2023 amid persistent cost pressures linked to the Middle East conflict and the yen’s sharp depreciation. Meanwhile, oil prices retreated after reports indicated that the US and Iran will continue peace negotiations despite a recent escalation in hostilities. That weighed on the dollar and Treasury yields while easing pressure on the yen by reducing import cost concerns for Japan, which depends heavily on Middle Eastern oil.