Japanese yen Strengthens on Risk-Off Mood
The Japanese Yen (JPY) continued its bullish momentum for the third consecutive day on Friday, advancing to a more-than-one-week high against the US Dollar (USD) during the Asian session. This renewed strength came amid heightened geopolitical risks in the Middle East, a weaker USD outlook, and diverging policy trajectories between the Bank of Japan (BoJ) and the US Federal Reserve (Fed). Traders seeking refuge from volatile global developments flocked to traditional safe-haven assets like the JPY, reinforcing the currency’s defensive appeal in times of crisis.
Middle East Conflict Escalates: Israel Strikes Iran
Investor risk appetite suffered a heavy blow following reports that Israel launched a full-scale pre-emptive military assault on Iran, targeting critical nuclear and missile infrastructure as well as military command centers. The Israeli Air Force conducted dozens of coordinated strikes across Iran, intensifying fears of a prolonged regional conflict.
In response, Israeli Defense Minister Israel Katz declared a state of emergency and warned of imminent retaliatory missile and drone attacks by Iran. These developments injected deep uncertainty into global markets and triggered a surge in demand for safe-haven assets like the Japanese Yen, Swiss Franc, and gold.
US Distances Itself as Iran Threatens American Bases
Further complicating matters, US Secretary of State Marco Rubio clarified that the United States had no role in Israel’s military action, signaling an effort by Washington to avoid direct involvement. However, Iranian Defence Minister Aziz Nasirzadeh issued a stark warning that any escalation over its nuclear program could result in missile attacks on US military bases in the region. The rhetoric underscored the potential for wider military confrontation involving global powers, adding another layer of risk to already jittery markets.
BoJ’s Hawkish Turn Reinforces Japanese yen Strength
Beyond geopolitical dynamics, fundamental monetary policy expectations are also providing a solid floor for the Japanese yen. While a recent Reuters poll suggested the Bank of Japan may not raise interest rates again this year, many investors continue to expect that the BoJ will remain on a tightening trajectory.
This is largely due to the persistent overshoot in Japanese inflation, which has remained above the central bank’s 2% target for over three years. The BoJ has already taken the first steps toward normalization with a rate hike earlier in 2024, ending its era of negative interest rates. Further tightening is not off the table, especially as inflationary pressures remain sticky in sectors like utilities and food.
Fed Expected to Cut Rates as Inflation and Jobs Data Cool
In stark contrast to the BoJ’s potentially hawkish stance, the Federal Reserve is seen moving toward monetary easing, possibly as early as September. Recent US data supports this dovish pivot:
- Producer Price Index (PPI) rose just 0.1% in May, following a 0.2% decline in April.
- On a year-over-year basis, PPI increased 2.6%, only slightly higher than the 2.5% recorded in April.
- Initial Jobless Claims held steady at 248K, but Continuing Claims rose to 1.951 million—the highest since November 2021.
These signs of cooling inflation and softening labor conditions have bolstered market bets that the Fed will initiate its rate-cutting cycle soon. Fed Funds futures now price in a 70% chance of a September rate cut, according to CME FedWatch data.
USD on the Back Foot Despite Modest Recovery
Although the US Dollar attempted a mild intraday recovery during Friday’s session, helped by bargain buying after plunging to its lowest level since March 2022, the bounce was limited. The overall sentiment surrounding the USD remains bearish amid growing conviction that the Fed’s next move is a rate cut.
With the BoJ seen holding firm—or even tightening—and the Fed potentially shifting to easing, this policy divergence continues to weigh on the USDJPY pair. The pair slipped to the 142.80–142.75 range before trimming losses modestly.
Trump’s Trade Bombshell Adds to Market Jitters
Adding another volatile element to the macro backdrop is Donald Trump’s renewed protectionist agenda. Speaking on Wednesday, Trump announced that he will unilaterally impose new tariff rates and notify trading partners within two weeks. Furthermore, his administration has expanded steel tariffs to 50%, now covering a broader array of consumer products such as refrigerators, dishwashers, and washing machines.
This move stoked fears of renewed trade tensions, especially with China and the European Union, and weighed on market sentiment. The reemergence of trade war concerns alongside military tensions and monetary policy shifts created a potent mix of risk-off drivers—further fueling demand for the JPY.
Japanese yen Looking Ahead: Consumer Sentiment and Inflation Expectations in Focus
Later today, traders will turn their attention to the University of Michigan’s Preliminary Consumer Sentiment Index and Inflation Expectations report for June. Any dovish signals in inflation expectations or weak sentiment readings could reinforce expectations of Fed easing and apply further downward pressure on the USDJPY pair.
However, geopolitical headlines are likely to dominate the short-term price action. Developments in the Middle East—especially any retaliatory strikes by Iran or further escalations involving US forces—will be closely monitored by markets. In this context, the JPY well-positioned to extend its safe-haven rally, especially if tensions worsen over the weekend.
Key Takeaways
- The Japanese Yen is strengthening amid heightened Middle East tensions and diverging monetary policy expectations.
- Israel’s preemptive strikes on Iran raise the risk of a wider regional war, boosting safe-haven demand.
- The BoJ’s hawkish tilt contrasts with rising expectations of a Fed rate cut in September.
- Trump’s new protectionist trade policies add to global uncertainty.
- Traders are watching for US consumer sentiment data, but geopolitics is driving the broader JPY narrative.
https://voiceoftraders.com/analysis/eurusd-soars-as-dollar-falters-on-soft-inflation
Why is the Japanese Yen considered a safe-haven currency?
What triggered the recent JPY rally?
JPY rally was fueled by:
- Israel’s preemptive airstrikes on Iran,
- Iran’s threat to retaliate and strike US military bases,
- The BoJ’s comparatively hawkish stance,
- Rising Fed rate cut expectations, and
- A drop in US economic indicators, especially inflation and labor market data.
