Japanese Yen Holds Firm Near Weekly High as Trade Tensions and Fed Outlook Weigh on USD.
The Japanese Yen (JPY) held its ground near weekly highs during early Thursday trading, showing continued strength against a broadly weaker US Dollar (USD). The USDJPY pair lingered close to the 144.00 mark, reflecting more than a 0.35% decline on the day. The Japanese yen resilience stems from growing safe-haven demand fueled by escalating geopolitical risks and lingering trade tensions, particularly between the United States and China.
While initial optimism surrounding the US-China trade talks briefly buoyed risk sentiment, it was swiftly overshadowed by new threats from US President Donald Trump to impose unilateral tariffs. Markets responded by rotating capital into traditional safe-haven assets, with the Japanese Yen standing out as a prime beneficiary.
Trade Truce Fades as Trump Revives Tariff Threats
US President Donald Trump reignited uncertainty over global trade policy by declaring on Wednesday that the United States will proceed with unilateral tariffs and pressure global partners with a take-it-or-leave-it offer. This hawkish rhetoric came just hours after initial reports indicated progress in US-China trade relations, with both sides seemingly working toward a plan to reduce export controls and ease tensions.
However, confidence in this fragile truce evaporated when China announced it would impose a six-month restriction on rare-earth export licenses to US automakers and manufacturers. Rare-earth metals are critical in the production of high-tech components, and the restriction signals China’s readiness to weaponize its supply chain dominance. In return, US negotiators offered temporary relief on export restrictions for select aerospace and petrochemical items, indicating a tentative détente—but one that remains vulnerable to rapid deterioration.
These developments stirred volatility across global markets and deepened concerns over a renewed escalation in trade conflict. The Japanese Yen, viewed as a safe haven in times of geopolitical and economic uncertainty, found support amid the worsening global trade environment.
Diverging Central Bank Policies Fuel Yen Demand
In parallel with geopolitical turbulence, monetary policy divergence between the Bank of Japan (BoJ) and the Federal Reserve (Fed) has become another key theme driving USD/JPY lower.
On the domestic front, inflation in Japan continues to show signs of broadening, leading investors to speculate that the BoJ could resume monetary tightening later this year. Although a recent Reuters poll suggests that a slim majority of economists expect no further hikes in 2025, markets appear to be pricing in at least one more rate increase, especially if core inflation continues to exceed target levels.
Conversely, the US inflation story has taken a more dovish turn. Data released Wednesday showed that the US Consumer Price Index (CPI) for May rose at a softer-than-expected pace—coming in at 2.4% year-over-year compared to the forecasted 2.5%. The core CPI, which strips out volatile food and energy prices, held steady at 2.8% but failed to justify a hawkish shift in Fed expectations.
Traders swiftly adjusted their outlooks, increasing the implied probability of a Fed rate cut in September from 57% to nearly 70%. This shift in sentiment triggered a decline in US Treasury yields, reinforcing downward pressure on the USD and amplifying support for the JPY.
Geopolitical Flashpoints Reinforce Japanese Yen Safe-Haven Appeal
Beyond trade tensions, geopolitical instability is compounding investor anxiety. Reports emerged on Wednesday that Israel is preparing for a potential military strike on Iranian nuclear facilities—a move that could significantly destabilize the Middle East.
In anticipation of a regional flare-up, the US State Department authorized the voluntary departure of some staff from Iraq, while the Pentagon is allowing families stationed at US military bases in the region to relocate. The precautionary steps reflect the growing risk of a military confrontation, especially after Trump expressed skepticism about reaching any new nuclear agreement with Iran.
These developments have catalyzed further risk aversion, steering capital flows toward safe-haven currencies like the Japanese Yen and Swiss Franc. As long as geopolitical risks remain elevated, the Yen is likely to retain its appeal among investors seeking protection against volatility.
US Dollar Retreats on Dovish Fed Expectations
With inflation slowing and risk appetite weakening, the US Dollar has entered a corrective phase. The Dollar Index (DXY), which measures the greenback against a basket of major currencies, fell to its monthly low following the CPI release. This coincided with a drop in US Treasury yields, as bond markets responded to rising expectations of rate cuts.
The USD’s retreat has been particularly pronounced against the Yen, as the differential in central bank outlooks becomes more apparent. While the Fed appears poised to lower borrowing costs in an effort to sustain growth, the BoJ may be preparing to continue its normalization journey, albeit cautiously.
This fundamental divergence weakens the attractiveness of the USD/JPY pair for carry trade investors, further supporting the Japanese currency.
Short-Term Outlook Hinges on US PPI and Fed Signals
Looking ahead, market participants are turning their attention to Thursday’s release of the US Producer Price Index (PPI). This inflation gauge, which measures changes in wholesale prices, could provide additional clarity on the near-term trajectory of Fed policy.
Should the PPI data confirm the disinflationary trend seen in the CPI report, it may reinforce market conviction about an upcoming Fed rate cut, thereby putting further downside pressure on the USDJPY pair. Conversely, a surprise to the upside could trigger a modest pullback in Yen strength, although any rally in the pair may be capped by prevailing risk aversion.
Technical Outlook: Japanese yen Poised for Further Decline
From a technical perspective, the USDJPY pair remains under pressure near the 144.00 level, just above weekly lows. A sustained break below this psychological support could open the door for a test of the 143.30–143.00 zone, which aligns with the 50-day moving average and a key Fibonacci retracement level.
On the upside, immediate resistance lies near 144.50, followed by stronger selling interest around the 145.00–145.20 range. As long as the pair remains below this threshold, the broader bias is expected to stay bearish, particularly in light of the shifting Fed-BoJ policy outlook and mounting geopolitical tensions.
Conclusion: All Eyes on Fed and Global Risk Landscape
The Japanese Yen’s strength is not merely a reflection of technical momentum—it’s underpinned by a broad mix of macroeconomic and geopolitical forces. From Trump’s unpredictable trade maneuvers to Fed policy recalibration and looming conflict in the Middle East, the risk landscape has tilted decisively in favor of safe-haven assets.
Unless the US economy delivers a strong inflation surprise or geopolitical tensions de-escalate meaningfully, the USDJPY pair is likely to remain under pressure, with further downside potential on the horizon.
