Rising geopolitical tensions and increased Fed tightening expectations lift the dollar to multi-decade highs against the yen.
The USD/JPY pair surged to its highest level in 40 years as escalating Middle East tensions and hawkish Federal Reserve expectations drove demand for the dollar. Fed rate hike bets climbed to 43 basis points by year-end, up from 32 bps last week, with a 33% chance of a July hike after soft inflation data failed to ease concerns.
Ongoing US-Iran conflict and disruptions in the Red Sea region weighed on risk sentiment, reinforcing the dollar’s strength. Meanwhile, the Bank of Japan signaled openness to faster rate hikes, though markets remain skeptical of sustained yen support amid unchanged fundamentals.
Traders are monitoring de-escalation signs, which could trigger a dovish repricing and pressure the dollar lower.