- The Japanese Yen (JPY) is falling after gains last week
- Japan imports most of its oil requirements
- The US Dollar (USD) rises against major peers
- USD rises on safe haven demand and as the US is an oil net exporter
The US dollar Japanese yen (USD/JPY) exchange rate is rising after gains last week. The pair rose 0.64% in the previous week, settling on Friday at 156.06. On Monday at 21:00 UTC, USD/JPY trades 0.83% at 157.37 and trades in a range of 155.98 to 157.75.
The yen has fallen sharply, dropping to a five-week low at the start of the week, as the markets react to conflict in the Middle East.
Rather than benefiting from safe-haven flows, the Japanese yen is falling amid surging oil prices. Oil prices have jumped by around 10%, with all eyes on the Strait of Hormuz. This is a key choke point where around 1/5 of the world’s seaborne oil trade and 25% of liquified natural gas trade pass through. Iran has warned tankers not to pass through.
Surging energy prices impact Japan due to the country’s reliance on oil imports.
The likelihood of a BoJ interest rate hike in March or April was already low, but given the uncertainty now stemming from the developments in the Middle East, the BoJ is likely to adopt A more cautious stance, further reducing the likelihood of a near-term rate hike.
The U.S. dollar is rising across the board. The US dollar index, which measures the USD against a basket of currencies, is rising 1% on Monday to 98.38 after losses last week.
The US dollar has jumped sharply higher on a combination of safe-haven flows and soaring oil prices, given that the US is a net oil exporter.
The dollar’s sharp rally after the US strikes over the weekend is evidence that the currency still functions as a global safe haven. This comes after months of growing doubts about the dollar’s safe haven appeal during times of stress, after the dollar failed to rally during last year’s tariff-induced global market sell-off
On the data front, US ISM manufacturing PMI came in above expectations at 52.4 in February and remained in expansionary territory for a second straight month.
Sub components such as new orders production also expanded, and the backlog of orders index jumped to 56.6, its highest level since mid-2020. Together, these indicators suggest that demand is firming up.
The data played second fiddle to events in the Middle East.