The Japanese yen weakened to its lowest level against the US dollar since late April during Wednesdays trading, approaching levels that previously prompted Japanese authorities to intervene in the currency market last month, as traders cautiously assessed the risk of renewed escalation in the war with Iran.
Meanwhile, the New Zealand dollar was among the days strongest-performing currencies after surging when the Reserve Bank of New Zealand unexpectedly moved closer to raising interest rates and signaled that tightening could come sooner and at a faster pace than previously expected.
The US dollar, viewed as a safe-haven currency, stabilized after posting modest gains against major currencies in the previous session, as US strikes on Iran reduced optimism over a near-term end to hostilities and the reopening of the vital shipping route through the Strait of Hormuz.
US Secretary of State Marco Rubio said negotiations on an agreement to end the conflict could take a few days.
The yen traded at 159.45 per dollar, its weakest level since April 30, when Japanese authorities intervened in the market to buy the currency. Many traders consider the 160 per dollar level a threshold that could trigger renewed intervention by Japanese authorities, as happened last month when the yen moved beyond that level.
Lee Hardman, currency strategist at MUFG Bank, said: Markets are clearly leaning toward optimism about the possibility of an agreement regarding Iran, and that has contributed this week to weakening the dollar and lowering bond yields.
He added: The surprise is that the yen remains weak. Falling energy prices and lower US Treasury yields would normally reduce the dollars gains against the yen, but that has not happened so far.
Bank of Japan Governor Kazuo Ueda adopted a more hawkish tone, warning that the oil price shock resulting from the war could become persistent amid rising inflation expectations and stronger wage growth.
Data from LSEG showed that markets are currently pricing in a 70% probability that the Bank of Japan will raise interest rates by a quarter percentage point at its next meeting on June 15-16.
The dollar index, which measures the US currency against the yen and five other major currencies, was steady at 99.08 points after rising 0.15% in the previous session.
The euro edged slightly higher to $1.1644, while the British pound remained stable at $1.3446.
The New Zealand dollar jumped 0.6% to $0.587, recovering losses from Tuesday when it had fallen by the same percentage.
The Reserve Bank of New Zealand left its official cash rate unchanged in a split decision, with three members voting for a quarter-point rate hike while three others favored keeping rates steady. Governor Anna Breman cast the deciding vote.
The bank said in its statement: Overall, the official cash rate is likely to need to rise sooner and by more than indicated in the February monetary policy statement.
Kelly Eckhold, chief economist at Westpac New Zealand, said: The governor appears to prefer waiting until there is clearer evidence of rising underlying inflation before taking action.
He added: The debate is still ongoing over whether the first rate hike will come in July or September.
In Australia, the Australian dollar fell 0.4% to $0.714, surrendering earlier gains after data showed annual inflation slowed to 4.2% in April from 4.6% in March, below analysts expectations of 4.4%.
That followed weak labor market data last week, prompting traders to price in limited interest rate increases for the remainder of the year, totaling no more than 20 basis points.