USD/JPY stayed firm near 159.10 in early Asian trading on Monday, as the US Dollar rose against the Japanese Yen amid renewed US–Iran tensions after more than seven weeks of war in the Middle East.
Iran said it would not take part in new peace talks with the US, after President Donald Trump said Iranian negotiators would go to Pakistan on Monday for a second round of talks, according to Bloomberg.
Trump said the US Navy fired upon and seized an Iranian-flagged cargo ship, while Tehran warned that ships approaching the strait would be treated as breaching a ceasefire. Several vessels stopped crossings hours after Tehran said the waterway was open.
In Japan, comments from officials were cited as a factor that could limit further Yen weakness. Finance Minister Satsuki Katayama said last week she discussed foreign exchange matters with US Treasury Secretary Scott Bessent, and said authorities are prepared for “bold” action if needed.
The Japanese Yen is influenced by Japan’s economic performance, Bank of Japan policy, the gap between Japanese and US bond yields, and overall risk sentiment. The Bank of Japan ran ultra-loose policy from 2013 to 2024, then began to unwind it in 2024, while the US–Japan 10-year yield spread has started to narrow.
With the USD/JPY pair nearing the 159.10 level due to US-Iran tensions, we should consider short-term bullish strategies. The current geopolitical climate favors the US Dollar as the primary safe-haven asset. Implied volatility on one-month options has jumped to over 11%, reflecting the market’s anticipation of sharp moves, which traders can use through straddles or strangles.
However, we must be extremely cautious as we approach the 160 level, a key psychological barrier. We have seen what happened in the spring of 2024 when Japanese authorities intervened directly in the market, causing the pair to drop several yen in a matter of hours. This threat of “bold” action creates a significant risk, making protective puts a prudent hedge for any long positions.
The fundamental picture still suggests a stronger Yen over the medium term. The Bank of Japan’s policy normalization, started back in 2024, has continued, with the 10-year Japanese government bond yield now sitting at 1.3%, its highest level in over a decade. This slowly narrows the interest rate differential with the US, which should eventually pull the USD/JPY pair lower.
While the Yen is traditionally a safe-haven currency, the direct involvement of the US military is causing a flight to the US Dollar for now. This is a pattern we also observed during the initial phases of geopolitical conflicts in 2022. Therefore, any long-term bearish positions on USD/JPY should be patient, waiting for the current geopolitical premium on the dollar to fade.
