USD/JPY traded little changed near 159.65 in early Asian Monday trading, as markets monitored developments in the US-Iran conflict. The US ISM Services PMI for March is due later on Monday.
US President Donald Trump said on Sunday he would destroy Iran’s power plants starting Tuesday, after US forces rescued an airman more than a day after his fighter jet was shot down. Iran rejected a demand to reopen the Strait of Hormuz and said it would respond to attacks on its infrastructure by targeting similar US-owned or related infrastructure.
Middle East Risk And Dollar Support
Ongoing uncertainty around any US-Iran ceasefire and tensions in the Middle East may support the US Dollar in the near term. At the same time, talk of possible action by Japanese authorities to support the Yen may limit USD/JPY gains.
Japan’s top currency diplomat, Atsushi Mimura, said last week that officials may need to take “decisive” steps if speculative moves persist in the currency market. The Yen’s value is influenced by Japan’s economic performance, Bank of Japan policy, the gap between Japanese and US bond yields, and wider risk sentiment.
The Bank of Japan sometimes intervenes in currency markets, but does so rarely. Its ultra-loose policy from 2013 to 2024 weakened the Yen, while a gradual shift away from that stance in 2024 has offered some support.
The current situation with the USD/JPY pair near 165.00 feels very familiar, reminding us of the tensions back in 2025. Today’s geopolitical stresses in the South China Sea are creating a similar push-pull dynamic, where both the US Dollar and the Japanese Yen are attracting safe-haven bids. This is keeping derivative traders on edge, as the pair could swing wildly on the next headline.
Intervention Risk And Policy Divergence
We must remain on high alert for direct intervention from Japanese authorities to support the yen. With the pair holding above the critical 160 level for several weeks, the verbal warnings from the Ministry of Finance are getting louder, just as they did in the past. Japan’s foreign currency reserves remain robust at over $1.2 trillion, giving them significant firepower to act decisively if they choose to.
The underlying driver remains the wide interest rate differential between the US and Japan. Even with the Bank of Japan having moved its policy rate to 0.25%, the Federal Reserve’s rate at 4.0% creates a massive gap that favors holding dollars. This fundamental pressure has fueled the yen’s weakness for years and makes it very expensive to bet against the dollar for long periods.
Given the risk of a sudden, sharp move, buying yen call options is becoming a popular strategy. Implied volatility has ticked up, with the VIX index hovering near 22, reflecting the market’s anxiety over both geopolitics and potential intervention. Options allow us to position for a rapid strengthening of the yen without the high cost of fighting the interest rate carry trade.
Looking ahead, we are watching next week’s US Consumer Price Index data closely. A higher-than-expected inflation number could force the dollar even higher and truly test the Bank of Japan’s resolve to defend its currency. This economic data will be just as important as any military or diplomatic development in the coming days.
