Japanese yen pressured by dollar strength

The Japanese yen extended its recent weakness on Thursday, slipping past the 145 per dollar mark and hovering near three-week lows.

This depreciation was largely driven by a strengthening US dollar, which gained ground after the Federal Reserve opted to keep interest rates unchanged and maintained a cautious stance on future policy adjustments. The Fed explicitly warned that President Trump’s recent tariffs could reignite inflationary pressures, complicating the economic outlook and pushing the central bank to remain vigilant.

Beyond domestic economic considerations, the dollar also benefited from its traditional role as a safe-haven currency amidst rising geopolitical tensions. The intensifying conflict between Israel and Iran has stoked fears of deeper US involvement in the Middle East, leading investors to seek the perceived safety of the greenback. This flight to safety further exacerbated the yen's weakness.

Meanwhile, the Bank of Japan (BOJ) had, just two days prior on Tuesday, also decided to keep its policy rates unchanged. Furthermore, the BOJ signaled a slow and measured approach to reducing its massive balance sheet.

BOJ Governor Kazuo Ueda reaffirmed that the central bank is closely monitoring both domestic and global economic conditions, leaving the door open to future rate hikes should inflationary pressures in Japan warrant such action. However, the market interpreted the BOJ's cautious tone on balance sheet reduction as a less hawkish signal than some might have anticipated, contributing to the yen's underperformance relative to the dollar, which is benefitting from both domestic economic signals and global risk aversion.

The divergence in monetary policy trajectories between the Fed's "higher for longer" narrative (or at least, less immediate cuts) and the BOJ's extremely gradual tightening, coupled with geopolitical risk, continues to put downward pressure on the Japanese currency.

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