Yen Volatility and Middle East Tensions Drive Dollar Strength in FX Markets

The Japanese yen remained a focal point in global foreign exchange markets on Monday, as it trimmed earlier gains against the U.S. dollar following a sharp rally driven by speculation of government intervention. The USD/JPY pair edged slightly higher to around 157.21 after briefly strengthening earlier in the day, highlighting ongoing volatility in the currency markets.

Market sentiment suggests that Japanese authorities may have stepped in last week to stabilize the yen, which has faced persistent weakness due to macroeconomic pressures. Reports indicate that Tokyo could have spent as much as 5.48 trillion yen (approximately $35 billion) in currency intervention, marking its first such move in two years. Analysts believe this action was aimed at preventing the dollar-yen exchange rate from breaching the 160 level, especially during Japan’s Golden Week holiday period when trading volumes are typically lower and price swings more pronounced.

Despite the intervention, experts caution that structural factors continue to weigh on the yen. Higher global oil prices, the U.S. Federal Reserve’s stance on interest rates, and Japan’s relatively low real yields all contribute to sustained downward pressure. Additionally, the yen remains a preferred funding currency for carry trades, further limiting its upside potential.

Meanwhile, the U.S. dollar gained support from increased safe-haven demand amid escalating geopolitical tensions in the Middle East. Renewed conflicts in the Strait of Hormuz, a critical route for global oil shipments, have heightened market uncertainty. Reports of attacks on vessels and disruptions to shipping routes have raised concerns about energy supply, boosting demand for the dollar.

The U.S. dollar index rose by 0.2% to 98.37, reflecting broader strength against major currencies. The euro and British pound both declined by 0.3%, trading at $1.1690 and $1.3530 respectively. Ongoing geopolitical risks and central bank policies are expected to keep forex markets volatile in the near term.