US dollar grinds higher – will Japan put a halt to USD/JPY rise?

JPY: Reduced prospects of yen buying intervention

The US dollar continues to grind stronger and DXY has now just broken the key 100-level with no change in conflict conditions in the Middle East. A US refuelling plane came down in Iraq but the US has denied this was due to hostile or friendly fire while US and Israel attacks continue and Iran retaliates with drone attacks. Efforts to dampen upward pressure on crude oil prices may be helping contain upward momentum with Brent settling into a narrower trading range around the USD 100-level. The IEA’s monthly report yesterday described the current situation as the biggest supply disruption on record. One positive aspect going into the conflict was the fact that according to the IEA there were 8.2bn barrels of global observed crude oil stocks, the largest total since February 2021 just after the initial period of the global pandemic. 25% of that total was “oil on water” and the US is attempting to free some of that stock by temporarily lifting the sanction on buying Russian oil. The oil price barely reacted.

The rising price of energy is always a big issue in Japan given it imports nearly all its energy needs. The rising price is being exacerbated by the continued depreciation of the yen and the Japanese authorities are set to come under increased pressure to halt yen depreciation. Is intervention imminent? We are not convinced but if intervention does take place it is unlikely to have lasting success. The MoF may well allow a break through the 160-level in order to gauge price action above that key level. We are now trading above the level where, in January, the Federal Reserve reportedly checked rates in USD/JPY, sending the cross 7 big figures lower over a three-day period. We have also breached the intra-day year-to-date high of 159.45 set on 14^th January.

Finance Minister Katayama refrained from commenting specifically but noted that there have been “large fluctuations” in financial markets due to the conflict in the Middle East. Katayama did add that the MoF was maintaining close communication with Washington – “even more closely than usual”.

The problem for the MoF is that this is clearly a US dollar move and hence would likely be futile to intervene at this stage. While USD/JPY is at a new year-to-date high, EUR/JPY is over 2% lower than the January high. On a trade-weighted basis the yen has weakened (AUD/JPY and CAD/JPY for example are higher) but the scale of weakness in the BoJ NEER is marginal - -0.4%. In addition, it would be difficult for the MoF to argue there has been disorderly price action. USD/JPY is just over 2% higher over ten trading days since the conflict began. Allowing a break above the 160-level could well prompt the disorderly price action that would provide the justification for action at that point. In any case, as stated above, the prospect of success in turning the yen stronger is low given the current global backdrop.

We appear set up for further US dollar strength from here. Crude oil prices have stabilised at elevated levels with scope for further gains while the break above the 100-level in DXY (and below 1.1500 in EUR/USD) could see positive momentum further reinforced by a potential break above the 160-level in USD/JPY.

USD/JPY HITS LEVEL NOT SEEN SINCE JULY 2024 HELPED BY OIL PRICE

Source: Bloomberg, Macrobond & MUFG GMR

G10: Central banks meet against Iran conflict uncertainty

There is an incredibly busy week of central bank meetings next week and however the conflict pans out between now and these meetings, investors should be in a better position in understanding the reaction functions of key G10 central banks by the end of next week. Incredibly, eight of the G10 central banks will meet next week starting with the RBA on Tuesday, followed by the Bank of Canada and the Fed on Wednesday, and then the BOJ, the SNB, Riksbank, the BoE and ECB on Thursday. Expectations of rate cuts in Europe have shifted notably with BoE OIS pricing shifting from about 50bps of cuts this year prior to the conflict to nearly 20bps of tightening. The ECB pricing has gone from about 15bps of cuts to nearly 50bps of hikes. The BoC is now priced for 40bps of hikes versus 10bps of cuts prior to the conflict. The Fed is still seen as cutting but now around 20bps of cuts is priced versus 60bps prior. For the BOJ there has been limited change with the BoJ before the conflict expected to hike close to two times, similar to the 48bps of tightening currently priced.

If there’s a central bank that hikes, it will likely be the RBA on Tuesday. The RBA has already hiked and Deputy Governor Hauser spoke this week of inflation being “toxic” and higher than what the RBA was expecting. The market gives a hike next week a 65% probability.

Whether currencies are rewarded by central bank hiking action is really dependent on investors views on growth. Hiking into weak economic conditions generally is deemed currency negative. The pound is actually the fourth best performing G10 currency since the conflict began (CAD; USD & AUD top three respectively) and has seen the biggest shift higher in yields. The pound could be deriving support from that although we see a scenario where that support could fall away quickly. If risk-off intensifies and global equities suffer larger falls, then higher yields will be less of a support for currencies.

Hiking rates with a clearer positive terms of trade impact has helped AUD perform well. Looking at Australia’s export breakdown, mineral fuels, including crude oil accounted for 27% of total exports in 2025, the second largest category of exports (behind ores, slag & ash). However, AUD risks are also high and a further spike in crude oil prices that raises global recession risks would likely see that drive a correction lower in AUD. That may well play into RBA considerations next week and with inflation already above target, the risk of a hike is high even given the backdrop of increased global uncertainties.  

RATE HIKE EXPECTATIONS HAVE MOVED IN FAVOUR OF NON-USD FX

Source: Bloomberg & MUFG Research

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com