USD/JPY snaps four-day rally as US-Iran conflict roils markets

The USD/JPY pair edged lower on Thursday, snapping a four-day winning streak as escalating military exchanges between the United States and Iran unsettled currency markets already on edge over potential Japanese intervention. The pair traded just below mid-162.00s during the session, hovering near its highest levels in four decades.fxstreet+2

Geopolitical Crosscurrents

The dollar had climbed steadily through the first half of the week on safe-haven demand after Washington launched fresh airstrikes on Iran in retaliation for attacks on commercial vessels in the Strait of Hormuz. Iran's Health Ministry said Thursday that U.S. strikes over the previous two days had killed at least 14 people and wounded 78 across five southern provinces. Tehran responded by targeting what it called "US bases and strategic centres" in Bahrain, Kuwait and Qatar.euronews+3

President Trump said Wednesday that the ceasefire with Iran was "over," while adding that Tehran "wants to make a deal so badly". The breakdown in diplomacy sent Brent crude higher and initially strengthened the dollar, but by Thursday the greenback's rally stalled as the conflict's widening scope gave traders pause.cbsnews+2

Yen Caught Between Carry and Intervention

The yen has been trapped near four-decade lows since late June, when it touched roughly 162.8 per dollar — its weakest since 1986. A gap of roughly 250 to 275 basis points between the Federal Reserve's target range of 3.50%–3.75% and the Bank of Japan's 1.0% policy rate continues to fuel the carry trade that weighs on the Japanese currency.cnbc+2

Japanese Finance Minister Satsuki Katayama reiterated this week that authorities "stand ready to intervene at any time," adding that Tokyo and Washington remain in close communication on exchange-rate policy. The warnings have prompted traders to unwind some short-yen positions, though analysts say past interventions have offered only fleeting relief given the structural headwinds facing the currency.fxstreet+2

Fed Signals and the Road Ahead

Minutes from the Fed's June meeting, released Wednesday under new Chairman Kevin Warsh, showed policymakers divided on the direction of rates but agreed that "some policy firming would likely be warranted" to return inflation to 2%. Markets are pricing in a 63% probability of a rate hike at the September meeting, according to FXStreet News Corp ↘ 13.24%, keeping the dollar's downside limited. Goldman Sachs ↘ 6.36% recently raised its 12-month USD/JPY forecast to 165, citing the persistent rate gap and the yen's structural vulnerabilities.xtb+3

With Gulf tensions threatening to push oil prices higher — an added burden for energy-importing Japan — the pair appears likely to remain rangebound near its multi-decade highs until either Tokyo intervenes or the geopolitical picture shifts decisively.fxstreet+1