The Japanese yen tested the 160-per-dollar level on Friday, prompting fresh warnings from Japanese officials, while the US dollar remained firm ahead of a key US jobs report. Ongoing tensions in the Middle East also continued to boost demand for safe-haven assets.
Middle East tensions support the dollar
The US dollar has been the strongest-performing major currency this week, gaining around 0.4% against a basket of peers and nearly 1.3% over the past month.
Support has come from stronger-than-expected US economic data, expectations of further Federal Reserve rate hikes, and increased safe-haven demand amid concerns that elevated energy prices could weigh heavily on import-dependent economies such as the eurozone, Japan, and China.
The US economic surprise index has climbed to its highest level in three years, following stronger-than-expected employment, consumer spending, and economic activity data, reviving the narrative of US economic exceptionalism.
Meanwhile, US 10-year Treasury yields have risen by roughly 50 basis points since the start of the Iran conflict, outpacing most major economies except the United Kingdom.
Jeremy Stretch, Head of G10 FX Trading at CIBC Capital Markets, said the US economy continues to generate positive surprises. With Treasury yields remaining above 4%, conditions are still supportive for the dollar, while higher energy prices represent a significant burden on the eurozone economy.
The euro rose 0.2% to $1.1634, although it remains down about 1% over the past month, while sterling advanced to $1.345.
Markets are now awaiting the release of the US nonfarm payrolls report later on Friday. A Reuters survey expects 85,000 jobs to have been added in May, following an increase of 115,000 in April, with the unemployment rate forecast to remain unchanged at 4.3%.
Peace talks between the United States and Iran remain stalled, while renewed hostilities this week have kept oil prices above $90 per barrel, increasing risks to global economic growth.
The yen and intervention concerns
The yen is on track for a fourth consecutive weekly loss against the dollar, as gains achieved following Japanese intervention in late April and early May have largely faded.
By Friday, the yen had once again approached the 160-per-dollar level, a threshold that previously triggered official intervention. This prompted another warning from Japanese Finance Minister Satsuki Katayama, who stated that Japan is prepared to act at any time and retains the right to take decisive measures against excessive currency volatility.
The yen was last trading at 159.93 per dollar.
Khoon Goh, Head of Asia Research at ANZ, said markets appear reluctant to aggressively test the Bank of Japan ahead of the US jobs report, particularly after authorities demonstrated renewed willingness to intervene.
Despite intervention risks, investors have built the largest speculative short positions against the yen since July 2024 in recent weeks. Analysts argue there is little incentive to unwind those positionsestimated at roughly $9 billionunless there is a significant shift in Japans interest-rate outlook or economic growth trajectory.
The Bank of Japan is widely expected to raise interest rates later this month as inflationary pressures increase due to higher energy import costs. Markets are also pricing in the possibility of a second rate hike before the end of the year.