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22/06/26
14
USD/JPY Holds Near Two-Year High on Dollar Strength and Geopolitical Risk
USD/JPY extended its advance on Monday, holding near the mid-161 area and moving back toward the nearly two-year high reached last Thursday. The pair remained supported despite renewed speculation that Japanese authorities could step in to slow the yen’s decline.
Japan’s finance minister reaffirmed that officials are prepared to respond to currency moves as needed, but that warning did little to change market positioning. The yen continued to lag as investors focused on the broader risks tied to the Middle East conflict, which has raised concerns about energy supply disruptions and the potential pressure on Japan’s economy.
Tensions remained elevated after reports that Iran had again closed the Strait of Hormuz, while also accusing the United States and Israel of breaking the ceasefire. Additional threats of military escalation contributed to a fragile backdrop, keeping geopolitical risk premiums elevated and supporting demand for the US dollar.
At the same time, expectations for additional tightening by the Bank of Japan have not been enough to generate sustained yen strength. Recent minutes from the central bank’s April meeting showed that some policymakers favored faster rate increases to prevent inflation from overshooting. Deputy Governor Himino also signaled that further hikes would depend on economic, price, and financial conditions.
Even so, Japan’s borrowing costs remain far below those in the United States, preserving the appeal of yen-funded carry trades. The Bank of Japan lifted its policy rate to 1.00% last week, the highest level since 1995, while the Federal Reserve kept its target range at 3.5% to 3.75%. That gap continues to favor the dollar.
Market pricing also reflects expectations that the Fed may raise rates at least once in 2026 if inflation proves sticky. Combined with the dollar’s broader strength and lingering geopolitical uncertainty, those expectations helped USD/JPY recover after Friday’s pullback and kept the pair near its recent highs.
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