The U.S. dollar retreated against the Japanese yen on Thursday after Japanese officials sent strong signals regarding potential intervention in the currency market, at a time when markets remain tense due to escalating Middle East friction.

Japanese Finance Minister Satsuki Katayama stated on Thursday that the timing for taking "decisive action" in the market is approaching.

The yen fell 0.55% to 159.45 against the dollar, after earlier hitting 160.72, its highest level since July 2024. The Japanese currency has declined by more than 2% since the outbreak of war on February 28.

Following its monetary policy meeting on Tuesday, the Bank of Japan indicated that it might raise interest rates in the coming months.

Investors are weighing the impact of rising oil priceswhich tend to pressure the yenagainst fears that Japanese authorities might intervene to support the currency near the 160 level.

Oil prices pressure Euro and Yen

Brent crude futures rose 2.5% following a report that the United States is considering military options to break the deadlock with Iran.

Demand for safe-haven assets had supported the dollar in March following the start of the war, reflecting the U.S. economy's lower exposure to high oil prices compared to the Eurozone and Japan.

Analysts believe a potential nuclear deal represents the primary hurdle to a Middle East peace agreement, as any deal that leaves Iran's nuclear program largely unchanged could be politically costly for the U.S. President domestically.

The dollar index fell 0.15% to 98.79 after recording 99.092, its highest level since April 13.

The Euro stabilized at 1.1680 dollars, while the British pound traded at 1.34877 dollars, showing little change.

The Bank of England and the European Central Bank are scheduled to hold their meetings later today, with markets awaiting their guidance amid growing expectations that they may soon be forced to raise interest rates.

Hawkish tilt from the Federal Reserve

U.S. Federal Reserve Chair Jerome Powell concluded his eight-year term by keeping interest rates unchanged amid mounting inflation concerns. The Fed's decision to hold rates was passed by an 8-4 vote, the largest split since 1992, with three dissents from officials who no longer see the need to signal a dovish bias toward monetary easing.

This hawkish tilt pushed bond yields higher, reaching their highest levels since March 27.

On Wednesday, traders scrapped bets on interest rate cuts this year, with markets now pricing in a 55% chance of a rate hike by April 2027, up from about 20% prior to the decision.

U.S. President Donald Trump expects Kevin Warsh, his nominee to succeed Powell on May 15, to cut interest rates. However, Warsh stated that he has made no such pledge to Trump.

Michael Pfister, currency strategist at Commerzbank, said:

"Current times might be suitable for cutting interest rates, and Warsh would have to convince his colleagues on the FOMC to take such action."

He added: "The dissents we saw yesterday show that this will not be easy, if he even wants to do it," referring to the removal of the easing bias.