USD/JPY extended its rise for a seventh straight day, gaining on eight of the past nine sessions, and reached a near three-week high in Tuesday’s European morning trade. It traded just above 159.00 after the US dollar recovered from a modest pullback from its highest level since 7 April.
Demand for the dollar was supported by geopolitical uncertainty and market pricing for tighter US policy. The yen was pressured by economic concerns linked to the Middle East conflict, despite Japan’s first-quarter GDP expanding faster than expected.
Geopolitical Developments And Market Impact
Donald Trump said on Monday he was holding off a planned attack on Iran at the request of Qatar, Saudi Arabia, and the United Arab Emirates, and said talks were not taking place. He also said the US military had been told to stay ready for a full-scale attack if no deal is reached, while doubts remained over Iran’s nuclear programme and the Strait of Hormuz.
Oil prices stayed elevated near a monthly high hit on Monday due to supply disruptions, adding to inflation concerns. CME Group’s FedWatch Tool showed traders pricing a nearly 50% chance of at least one 25 bps Fed rate rise by year-end.
Speculation about Japanese currency support measures could limit further USD/JPY gains. Markets are also awaiting the FOMC Minutes on Wednesday for guidance on the Fed’s policy path.
With USD/JPY now trading above the 159.00 mark, we are seeing a clear continuation of the trend driven by interest rate differentials. A strong US Dollar is being supported by renewed geopolitical unease in the South China Sea, reinforcing its safe-haven appeal. This is occurring despite Japan posting a modest 0.4% GDP growth in the first quarter of 2026, as concerns over high energy import costs are outweighing domestic economic news.
We are seeing inflationary pressures build again globally, with WTI crude holding firm above $95 a barrel, a significant jump from the averages we saw through most of 2025. Consequently, the market is re-evaluating the Federal Reserve’s next move, with the CME FedWatch Tool now indicating a 45% probability of a 25 bps rate hike by September 2026. This hawkish sentiment provides a strong floor for the dollar, particularly against the yen.
Intervention Risk And Derivatives Positioning
However, we must remain extremely cautious about potential intervention from Japanese authorities to prop up the Yen as we approach the 160.00 level. We all remember the multiple, aggressive interventions back in the spring of 2024 when the pair first crossed that psychological threshold. That recent history is a key reason traders may hesitate to push the pair significantly higher from here without a fresh catalyst.
For derivative traders, this suggests buying call options with strike prices just below the 160.00 intervention zone could capture further gains while managing risk. Another strategy we are considering is selling out-of-the-money put options to collect premium, based on the belief that the wide policy divergence between the Fed and Bank of Japan will prevent any sharp, sustained drop. The elevated volatility also makes long straddles an interesting play for those expecting a big move in either direction following the upcoming FOMC minutes.
