USD/JPY rose for a sixth straight day, trading near 158.90 in Asian hours on Monday. The US dollar strengthened as the Federal Reserve moved towards a tougher stance on inflation.
Fed officials said curbing inflation remains the main goal and further rate rises may be needed if price pressures continue. Markets lifted the implied chance of a December rate rise to nearly 48%, up from 14% a week earlier, based on the CME FedWatch tool.
The dollar also gained from demand for safer assets as geopolitical conflict continued. The US and Iran were still far from an agreement to end weeks of fighting and reopen the Strait of Hormuz shipping route.
US President Donald Trump warned Iran to make progress or face new consequences. With the strait effectively closed, oil prices kept rising, adding costs for energy-importing countries.
Tensions also increased after Chinese leader Xi Jinping warned that Taiwan could lead to direct clashes between the US and China. Japan faced added pressure as stronger producer inflation raised expectations that the Bank of Japan may adjust its low interest rates.
BoJ board member Kazuyuki Masu said policy rates should be raised as soon as possible due to ongoing inflation risks. ING projected Japan’s first-quarter GDP at 0.3% quarter-on-quarter and forecast April inflation at 1.8% year-on-year, with subsidies limiting broader price rises.
The widening policy gap between a hawkish US Federal Reserve and a pressured Bank of Japan suggests the dollar’s strength against the yen will persist. We see the USD/JPY pair, now near 158.90, having a clear path to test the 160.00 psychological barrier in the near future. This trend is reinforced by ongoing geopolitical tensions that boost the dollar’s appeal as a safe-haven asset.
For derivative traders, this environment makes long USD/JPY call options an attractive strategy over the next few weeks. This approach allows for participation in further upside while capping potential losses to the premium paid. With the Cboe Volatility Index (VIX) currently elevated near 22, uncertainty is high, making defined-risk positions the most prudent way to trade this directional view.
The sustained closure of the Strait of Hormuz is a critical factor, directly punishing Japan’s energy-import-dependent economy. With WTI crude oil prices now pushing past $85 a barrel, this trend will continue to fuel imported inflation in Japan and strain its trade balance. This fundamental weakness makes selling the yen a compelling trade.
We must, however, be highly vigilant for currency intervention by Japanese authorities as the pair approaches the 160.00 level. Looking back to 2024, we saw Tokyo step in forcefully to defend the yen when it crossed that threshold. Traders should consider placing take-profit orders or using trailing stops to protect gains from a sudden reversal.
The Federal Reserve’s pivot toward a more aggressive stance remains the core pillar of this trade. With markets now pricing a nearly 48% probability of a rate hike by December, the dollar’s yield advantage is set to expand further. Unless upcoming US economic data shows a dramatic and unexpected cooling of inflation, the path of least resistance for the dollar is upward.
