Rising US Treasury yields and Middle East tensions fuel dollar strength, pushing USD/JPY to its highest level since 1986.
USD/JPY extended its rally to a fresh 40-year high above 163.00, driven by a resurgence in US Treasury yields and persistent Middle East geopolitical risks. The 10-year yield rose to 4.63%, while the 2-year yield climbed to 4.26%, reinforcing expectations of a hawkish Federal Reserve stance amid elevated oil prices and inflation concerns.
The yen remains under pressure as the Bank of Japan’s rate hike path appears uncertain, with cost-push inflation and a weakening domestic economy complicating policy decisions. Meanwhile, the dollar benefits from safe-haven demand and shifting Fed rate cut expectations, which have been pushed further out.
Market focus remains on the pair’s trajectory, with little sign of a near-term reversal unless fundamental drivers—such as Treasury yields or geopolitical risks—shift materially. The yen’s decline has been exacerbated by Japan’s economic outlook, which continues to weigh on investor sentiment.