Renewed strength in the US dollar pushed the Japanese yen back toward the critical 160-per-dollar level on Wednesday, prompting verbal warnings from Japanese officials and keeping traders on alert for possible intervention in the currency market, while fresh military developments in the Gulf boosted demand for the dollar as a safe-haven asset.

Renewed clashes in the Middle East

The United States said Iran launched ballistic missiles toward neighboring countries in the region, though no targets were hit, adding that US forces carried out strikes on Qeshm Island in response.

At the same time, diplomatic talks between Iran and the United States remain stalled, keeping a cautious mood across financial markets. The dollar typically benefits during periods of escalating regional tensions due to its safe-haven status and the relatively lower sensitivity of the US economy to energy-price shocks. In contrast, the yen tends to weaken when oil prices rise because of Japans heavy dependence on energy imports.

The critical level

The yen fell to the 160-per-dollar level on Wednesday, a threshold closely watched by markets after Japanese authorities previously intervened around that area. The decline erased gains achieved following Tokyos intervention last month, when authorities spent JPY11.7 trillion, equivalent to roughly $73 billion, to support the struggling currency.

Japanese Prime Minister Sanae Takaichi later said authorities stand ready to act and respond to foreign-exchange movements when necessary.

Following her remarks, the dollar eased slightly to JPY159.66.

Terms-of-trade shock is the biggest factor weighing on the yen, said Gustav Helgesson, macro strategist at SEB.

If the Strait of Hormuz is reopened, I would expect some of the pressure driving yen weakness to fade, he added.

Bank of Japan Governor Kazuo Ueda was scheduled to deliver a closely watched speech later on Wednesday, with investors looking for clues regarding the likelihood of an interest-rate increase in June.

Global currencies remain range-bound

Across broader currency markets, movements remained relatively subdued.

The euro slipped 0.1% to $1.1620, while sterling was little changed at $1.3460.

Data released on Tuesday showed eurozone inflation accelerated further last month, driven by higher energy and services costs, strengthening expectations that the European Central Bank will raise interest rates later this month.

The prolonged conflict in the Middle East and persistently elevated energy prices have led investors to increase bets on tighter monetary policy from major central banks this year, marking a sharp shift from the rate-cut expectations that dominated before the conflict began.

The Dollar Index, which tracks the US currency against a basket of major currencies, held steady at 99.29.

US labor market data in focus

US data released on Tuesday showed job openings rose at the fastest pace in five years during April, although the surge may overstate the underlying strength of the labor market.

Private-sector employment data is due later on Wednesday, ahead of Fridays closely watched Nonfarm Payrolls report.

The Nonfarm Payrolls report could be very important for the dollar, said Helgesson of SEB.

It could push the Federal Reserve further away from an easing bias and toward thinking about raising interest rates. I believe this could mark the beginning of a shift in market sentiment toward the dollar.

Markets are currently pricing in roughly 18 basis points of US rate increases by December, with a full quarter-point hike priced in by March next year.

Swiss franc weakens as markets reassess positions

Elsewhere, the Swiss franc edged lower against both the dollar and the euro.

Last year, the Swiss franc appeared to be one of the biggest beneficiaries, alongside gold and Bitcoin, of the dollar-debasement narrative, said Chris Turner, Global Head of Markets at ING.

But if markets become more confident that the Federal Reserve could actually move toward raising rates, we may see further unwinding of those dollar-bearish positions, he added.