Yen Plunges to Biggest Weekly Drop in Two Months as Dollar Rises on Oil and Risk Sentiment

The dollar is set for its strongest weekly gain since mid-June, supported by rising oil prices, while the yen is on track for its largest weekly percentage decline in over two months, hovering near four-decade lows despite Tokyo’s repeated efforts to defend the currency.

Verbal interventions have yielded disappointing results, with Finance Minister Satsuki Katayama reaffirming the government’s willingness to act in currency markets.

Analysts expect any further intervention by Japanese authorities to be fleeting, lacking the impact of coordinated measures such as more aggressive monetary tightening by the Bank of Japan (BoJ).

The US Treasury Department last week joined the chorus calling for BoJ rate hikes, warning that excessive currency volatility is undesirable.

According to London Stock Exchange Group (LSEG) data, markets have entirely priced out a rate hike from the BoJ at its upcoming policy meeting.

Thierry Wizman, global foreign exchange and rates strategist at Macquarie Group in New York, said: “It’s not surprising that dollar-yen has risen in the current environment. This is a low-yielding currency facing a terms-of-trade shock from higher oil prices.”

Wizman added that if speculators were to target any currency in these conditions, “it’s going to be the yen.”

He cited this as the core thesis for the greenback’s strength since the Iran war began and oil prices surged.

The conflict started on Feb 28. The dollar index, which tracks the greenback against a basket of major currencies, rose marginally by 0.01% to 101.46, marking a weekly gain of around 0.7% and its strongest week in five weeks.

Versus the yen, the dollar dipped 0.02% to 163.81, but climbed nearly 0.9% over the week, its best week against the yen since May 15.

Last Thursday, the dollar reached 163.98, its highest level against the yen since November 1986.

The greenback has been climbing in recent days as renewed hostilities in the Iran war triggered a turnaround in oil prices and reignited inflation worries, bolstering expectations that the US Federal Reserve (Fed) may raise rates.

The US economy is viewed as more resilient to energy price shocks compared with Europe and Japan, providing additional support to the dollar.

US crude fell 3.47% to $88.99 per barrel, while Brent slipped to $96.48, down 4.12% for the day, after retreating from a two-month high of $102 reached the previous Thursday.

Expectations for a Fed rate hike at its upcoming meeting have increased to 35.8%, up from 12.8% a week ago. While cooler June inflation data initially raised hopes for a delay, escalating Iran war tensions have rekindled inflation fears.

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