Geopolitical risks and Bank of Japan’s delayed rate hikes drive yen weakness, offsetting softer US inflation expectations.
The USD/JPY pair approached a four-decade high as escalating US-Iran tensions and stagnant Bank of Japan policy weighed on the yen. Markets now price only a 15% chance of a Fed rate hike in July, though September odds remain above 50% at 61%.
The BoJ is widely expected to hold rates steady in July, with the next hike not anticipated before December. Japanese officials have warned of stealth interventions to curb speculative pressure, slowing yen depreciation but failing to reverse the trend.
A potential US-Iran ceasefire could weaken the dollar, while full-scale conflict would likely push it to new highs, keeping volatility elevated.