The Japanese yen tested the ¥160-per-dollar level on Friday, prompting fresh warnings from Japanese officials, while the US dollar remained firm ahead of a key US jobs report. Ongoing tensions in the Middle East also continued to boost demand for safe-haven assets.

Middle East tensions support the dollar

The US dollar has been the strongest-performing major currency this week, gaining around 0.4% against a basket of peers and nearly 1.3% over the past month.

Support has come from stronger-than-expected US economic data, expectations of further Federal Reserve rate hikes, and increased safe-haven demand amid concerns that elevated energy prices could weigh heavily on import-dependent economies such as the eurozone, Japan, and China.

The US economic surprise index has climbed to its highest level in three years, following stronger-than-expected employment, consumer spending, and economic activity data, reviving the narrative of US economic exceptionalism.

Meanwhile, US 10-year Treasury yields have risen by roughly 50 basis points since the start of the Iran conflict, outpacing most major economies except the United Kingdom.

Jeremy Stretch, Head of G10 FX Trading at CIBC Capital Markets, said the US economy continues to generate positive surprises. With Treasury yields remaining above 4%, conditions are still supportive for the dollar, while higher energy prices represent a significant burden on the eurozone economy.

The euro rose 0.2% to $1.1634, although it remains down about 1% over the past month, while sterling advanced to $1.345.

Markets are now awaiting the release of the US nonfarm payrolls report later on Friday. A Reuters survey expects 85,000 jobs to have been added in May, following an increase of 115,000 in April, with the unemployment rate forecast to remain unchanged at 4.3%.

Peace talks between the United States and Iran remain stalled, while renewed hostilities this week have kept oil prices above $90 per barrel, increasing risks to global economic growth.

The yen and intervention concerns

The yen is on track for a fourth consecutive weekly loss against the dollar, as gains achieved following Japanese intervention in late April and early May have largely faded.

By Friday, the yen had once again approached the ¥160-per-dollar level, a threshold that previously triggered official intervention. This prompted another warning from Japanese Finance Minister Satsuki Katayama, who stated that Japan is prepared to act “at any time” and retains the right to take “decisive measures” against excessive currency volatility.

The yen was last trading at ¥159.93 per dollar.

Khoon Goh, Head of Asia Research at ANZ, said markets appear reluctant to aggressively test the Bank of Japan ahead of the US jobs report, particularly after authorities demonstrated renewed willingness to intervene.

Despite intervention risks, investors have built the largest speculative short positions against the yen since July 2024 in recent weeks. Analysts argue there is little incentive to unwind those positions—estimated at roughly $9 billion—unless there is a significant shift in Japan’s interest-rate outlook or economic growth trajectory.

The Bank of Japan is widely expected to raise interest rates later this month as inflationary pressures increase due to higher energy import costs. Markets are also pricing in the possibility of a second rate hike before the end of the year.

The euro advanced in European trading on Friday against a basket of global currencies, extending gains for a second consecutive session against the US dollar as risk sentiment improved and investors maintained hopes that the United States and Iran could reach a peace agreement to end the conflict in the Middle East.

Global financial markets are now awaiting the release of the US May nonfarm payrolls report later today, which is expected to provide further clues about the Federal Reserve’s interest rate path this year.

Price Overview

• EUR/USD today: The euro rose by around 0.2% against the dollar to $1.1628, up from an opening level of $1.1610, after touching an intraday low of $1.1608.

• The euro closed Thursday up 0.1% against the dollar, recording its first gain in four sessions following the announcement of a ceasefire between Hezbollah and Israel through US mediation.

US Dollar

The US Dollar Index fell about 0.1% on Friday, extending losses for a second straight session and moving further away from its two-month high, reflecting continued weakness in the US currency against a basket of major global peers.

The dollar remains under pressure as risk appetite improves moderately, supported by investor optimism that the United States and Iran are nearing a peace agreement that could bring an end to the three-month conflict.

Later today, markets will focus on the US May employment report, which is expected to provide stronger evidence regarding the Federal Reserve’s interest rate outlook, particularly given elevated market pricing for a 25-basis-point rate hike in December.

Global Oil Prices

Oil prices fell by more than 0.5% on Friday, extending losses for a second consecutive day amid growing optimism that the United States and Iran could reach a peace agreement that includes reopening the Strait of Hormuz.

Latest Developments in the Iran Conflict

• Hezbollah’s leader rejected the proposed ceasefire agreement in Lebanon.

• The rejection continues to cloud the outlook for Middle East stability and efforts to end the Iran conflict.

• The Lebanon ceasefire remains linked to broader negotiations between the United States and Iran.

• US President Donald Trump said talks with Iran are progressing well and suggested that meaningful developments could emerge by the end of this week.

• Trump added that he could meet Iran’s Supreme Leader “if an agreement is reached.”

European Interest Rates

• Data released this week showed that inflation in the eurozone accelerated last month, driven by higher energy and services prices as a consequence of the Iran conflict.

• Following those figures, money markets increased the probability of a 25-basis-point European Central Bank rate hike in June from 90% to 95%.

• Sources told Reuters that the ECB is highly likely to raise interest rates in June, given inflation projections that are moving toward a less favorable scenario.

The Japanese yen rose in Asian trading on Friday against a basket of major and minor currencies, extending its recovery from a five-week low against the US dollar. Despite the rebound, the Japanese currency remains on track to post another weekly loss, weighed down by escalating geopolitical tensions in the Middle East.

Data released in Tokyo showed stronger-than-expected wage growth in Japan, adding to inflationary pressures on policymakers at the Bank of Japan and strengthening expectations of an interest rate hike later this month.

Price Overview

• USD/JPY today: The dollar fell by around 0.1% against the yen to ¥159.90, from an opening level of ¥160.01, after reaching an intraday high of ¥160.02.

• The yen closed Thursday up about 0.1% against the dollar, recording its first daily gain in four sessions as part of a recovery from a five-week low of ¥160.09.

Weekly Performance

So far this week, which officially concludes with Friday’s settlement, the yen is down approximately 0.5% against the US dollar and is on course for its fourth consecutive weekly decline.

The losses have been driven by renewed military tensions in the Gulf region, which have reduced optimism about the success of peace negotiations between the United States and Iran.

Japanese Wages

Japan’s Ministry of Labor reported on Friday that total monthly cash earnings, along with a separate measure of full-time wages, increased 3.5% year-over-year in April, exceeding expectations of a 3.2% rise. Wage growth had previously reached 3.1% in March.

Stronger wage growth is widely viewed as paving the way for further price increases and faster inflation in the months ahead, increasing pressure on Bank of Japan policymakers and reinforcing expectations of a rate hike in June.

Japanese Interest Rates

• Bank of Japan Governor Kazuo Ueda said on Wednesday that the central bank needs to continue raising interest rates in response to economic and inflation developments.

• Ueda added that upside risks to prices appear greater than downside risks and could materialize faster than previously anticipated.

• Following the wage data and Ueda’s comments, market pricing for a 25-basis-point rate hike at the June meeting rose from 65% to 85%.

• The Bank of Japan is scheduled to meet on June 15–16 to assess the appropriate monetary policy stance for the world’s fourth-largest economy.

The ¥160 Threshold

Japanese authorities continue to closely monitor currency movements, particularly as the yen hovers around the critical ¥160-per-dollar level, which markets view as a potential trigger for official intervention.

According to Reuters sources, Tokyo intervened several times in late April and early May to support the currency, although the resulting strength proved short-lived. At that time, the exchange rate weakened to ¥159.25 per dollar, its lowest level since April 30.

Japanese officials have repeatedly warned against excessive currency volatility and indicated that decisive action could be taken against disorderly market moves.

Finance Minister Satsuki Katayama reiterated that the government is “prepared to take appropriate action” if currency markets experience excessive or speculative movements.

US Dollar

The US Dollar Index fell about 0.1% on Friday, extending losses for a second consecutive session and moving further away from its two-month high, reflecting continued weakness in the US currency against a basket of global peers.

The dollar has come under pressure as risk appetite improves modestly and investors maintain hopes that the United States and Iran are nearing a peace agreement that could bring an end to the three-month conflict.

Latest Developments in the Iran Conflict

• Hezbollah’s leader rejected the proposed ceasefire agreement in Lebanon.

• The rejection has cast a shadow over Middle East stability and prospects for ending the Iran conflict.

• The Lebanon ceasefire remains linked to broader negotiations between the United States and Iran.

• US President Donald Trump said talks with Iran are progressing well and hinted that meaningful developments could emerge by the end of this week.

• Trump also stated that he could meet Iran’s Supreme Leader “if an agreement is reached.”

Most cryptocurrencies declined during Thursday trading despite signs of easing tensions in the Middle East, with Ethereum extending its losses and falling below the key psychological level of $1,800.

As of 21:08 GMT, Ethereum was down 1.5% on CoinMarketCap, trading at $1,771.

Iran conflict remains a key focus

Israel and Lebanon announced late Wednesday that they had agreed to implement a ceasefire, raising hopes for a broader agreement between Washington and Tehran. Iran had previously linked any potential deal, at least in part, to an end to the fighting between Israel and the Iran-backed Hezbollah movement in Lebanon.

John Evans, analyst at PVM Oil Associates, said Iran continues to insist on ending what it describes as Israeli aggression against Hezbollah in Lebanon, adding that there are already signs of a potential breakthrough.

Lebanese President Joseph Aoun said on Thursday that the ceasefire would take effect within 24 hours once all parties involved approve it.

US President Donald Trump also suggested on Wednesday that progress in negotiations with Iran could be achieved as soon as this weekend.

Iranian Foreign Minister Abbas Araghchi stated on Wednesday that communication channels between Tehran and Washington remain open, although he acknowledged that no meaningful progress has yet been made, adding that both sides are still reviewing the exchanged draft proposals.

Meanwhile, the Republican-controlled US House of Representatives approved a resolution on Wednesday aimed at preventing Trump from continuing the war against Iran. For the measure to take effect, it must still pass the Senate and secure a two-thirds majority in both chambers to override an expected presidential veto.

Economic data

On the economic front, a survey released on Wednesday showed that the prices-paid component of the US services sector rose to its highest level in nearly four years last month, reinforcing expectations among economists that the Federal Reserve will keep interest rates unchanged through next year.