USD/JPY rose to about 159.15 in Asian trading on Friday, with the US Dollar supported by worries about the Strait of Hormuz and the wider Middle East. Markets are also watching the US March CPI inflation report due later on Friday.
US President Donald Trump said on Tuesday he agreed “to suspend the bombing and attack of Iran for a period of two weeks” if Iran re-opens the Strait of Hormuz. On Friday he accused Iran of doing a “very poor job” of handling oil through the waterway and said he could order large-scale attacks if ceasefire terms are not met.
Middle East Tensions And Dollar Support
US Vice President JD Vance and envoys Steve Witkoff and Jared Kushner are scheduled to hold talks in Pakistan on Saturday about a possible long-term deal with Iran. In Japan, Prime Minister Sanae Takaichi said the government is weighing the release of about 20 days’ worth of extra oil reserves from early May to stabilise supplies amid shipping disruption.
Markets price in a possible Bank of Japan rate rise at the April meeting, which could support the yen. Citi Research’s Tomohisa Fujiki put the chance of such a move at up to 70%.
The yen is influenced by Japan’s economic performance, Bank of Japan policy, and the gap between US and Japanese bond yields. Its value can also shift with changes in market risk appetite.
With the USD/JPY pair pushing above 159, we are seeing a classic flight to the US Dollar driven by geopolitical fears surrounding the Strait of Hormuz. This tension has sent oil prices surging, with Brent crude futures climbing over 12% in the last two weeks to near $105 a barrel, further bolstering the dollar’s appeal. Traders should be cautious of this momentum as it is based on news events, not just fundamentals.
The immediate focus must be on the US Consumer Price Index report due later today, which will be a major catalyst. Market consensus is for a slight cooling in core inflation, which, if confirmed, could take some strength out of the dollar and see the pair pull back sharply from these highs. Any upside surprise in inflation, however, would likely fuel bets on a hawkish Federal Reserve and could push the pair towards the 160 level.
BoJ Policy And Rate Differentials
We see a significant probability of a Bank of Japan rate hike at the upcoming April policy meeting, which would directly challenge the yen’s weakness. We remember how the yen strengthened after the BoJ finally moved away from its negative interest rate policy back in March 2024. A second hike would accelerate this trend and could trigger a rapid downward correction in USD/JPY.
This potential BoJ action makes the interest rate differential between US and Japanese bonds the critical metric to watch. The spread between the US 10-year Treasury and its Japanese equivalent is currently sitting near 380 basis points, a level that has historically supported a strong dollar. A BoJ hike would begin to close this gap, making options that bet on a lower USD/JPY in the coming weeks, such as put options, look increasingly attractive.
Given the opposing forces of geopolitics and monetary policy, volatility is the main theme. The Cboe’s USD/JPY Volatility Index (JYVIX) has already climbed to its highest point since the market stress we experienced in late 2025. This environment suggests that long volatility strategies, like buying straddles or strangles, could be effective for traders who anticipate a large price swing but are uncertain of the direction.
The diplomatic talks scheduled in Pakistan this weekend represent a significant wildcard for the market. A successful de-escalation agreement with Iran would likely cause a sharp drop in oil prices and unwind the dollar’s recent risk premium, sending USD/JPY lower. Conversely, a breakdown in negotiations would reinforce the dollar’s safe-haven status and could propel the pair even higher.
