Japanese Yen weakens as hawkish Fed bets drive USD higher

USD/JPY extends its gains for the sixth successive day, trading around 158.90 during the Asian hours on Monday. The US Dollar (USD) gains value against other currencies because the US Federal Reserve (Fed) is shifting toward a more aggressive stance on inflation.

Several Fed officials recently emphasized that controlling inflation is their top priority, even suggesting that further interest rate hikes could be necessary if price pressures persist. Financial markets have sharply increased the likelihood of a December rate hike to nearly 48%, up significantly from just 14% a week prior, according to the CME FedWatch tool.

Meanwhile, the Greenback is benefiting from its status as a safe-haven asset due to ongoing geopolitical conflicts. The United States (US) and Iran remain far from an agreement to end weeks of fighting and reopen the critical Strait of Hormuz shipping route.

US President Donald Trump escalated tensions by publicly warning Iran to make progress or face new consequences. Because the Strait remains effectively closed, global oil prices are continuing to climb, which places a heavy economic burden on countries that rely heavily on energy imports. Global investor anxiety is heightened further by warnings from Chinese leader Xi Jinping to President Trump that Taiwan could trigger direct clashes between their two economies.

Meanwhile, Japan is facing its own economic hurdles as a result of these global pressures. Stronger-than-expected producer inflation data has fueled market expectations that the Bank of Japan (BoJ) will need to adjust its historically low interest rates. Highlighting this urgency, central bank board member Kazuyuki Masu advocated for raising policy rates as quickly as possible, warning that the ongoing war is creating persistent inflation risks that the country must address.

ING’s Min Joo Kang expects Japan’s economy to maintain similar growth to the previous quarter, with first-quarter Gross Domestic Product (GDP) seen rising 0.3% quarter-on-quarter. The war-related energy shock is judged to have a limited impact on trade and growth but a more visible effect on inflation. ING forecasts April inflation at 1.8% year-on-year, helped by subsidies that cap broader price pressures.