Yen drops against dollar as the Iranian war worsens

The Japanese yen fell in Asian trading on Monday against a basket of major and minor currencies, resuming losses after a two-day pause against the US dollar, as investors favored the dollar as the preferred safe-haven asset amid escalating global geopolitical tensions and growing military confrontation between the United States and Israel on one side and Iran on the other.

With inflationary pressures easing on policymakers at the Bank of Japan, expectations for a Japanese interest rate hike in March have declined. Investors are now awaiting additional key economic data from Japan to reassess those expectations.

Price Overview

• Japanese yen exchange rate today: The US dollar rose against the yen by 0.4% to 156.71 yen, up from the day’s opening level at 156.07 yen, while recording a session low at 156.07 yen.

• The yen ended Friday’s trading up by 0.1% against the dollar, marking its second consecutive daily gain as part of a recovery from a two-week low of 156.82 yen.

• Over the course of February, the yen lost about 0.8% against the dollar, pressured by concerns surrounding potential expansionary economic policies proposed by Japanese Prime Minister Sanae Takaichi.

The US Dollar

The dollar index jumped by about 0.45% on Monday, reaching a six-week high at 98.09 points, reflecting broad strength in the US currency against a basket of global currencies.

This rise came as investors increased purchases of the dollar as a preferred safe-haven asset after the United States and Israel carried out strikes on Iran, which reportedly resulted in the death of Supreme Leader Ayatollah Ali Khamenei, raising fears of a prolonged military conflict in the Middle East.

The Iranian Conflict

The current conflict began with surprise military strikes targeting sensitive sites inside Iran in what has been described as the most serious escalation in years. The United States and Israel launched coordinated attacks on strategic Iranian targets, saying they were linked to military and security capabilities, in a move seen as a major turning point in the ongoing tensions.

Tehran responded quickly by launching waves of missiles targeting American assets and bases across several Gulf countries, broadening the scope of the confrontation and increasing regional risks.

In a highly sensitive development, Iranian Supreme Leader Ali Khamenei was reportedly killed on the first day of the strikes, a development that triggered a major political and security shock both inside and outside Iran, adding an unprecedented dimension to the conflict.

Iran declared a state of maximum alert and vowed a broad and painful response, while US and Israeli forces raised their readiness levels in anticipation of further escalation.

Within hours of the strikes, partial airspace closures were announced across several countries in the region, alongside increased military movements and growing fears of a wider regional war.

The military operations were accompanied by strong political messaging, with each side seeking to establish new deterrence dynamics as the international community closely monitors developments that could reshape the balance of power in the Middle East.

Japanese Interest Rates

• Analysts at Morgan Stanley and MUFG wrote in a joint research report: We had considered the probability of a Japanese rate hike in March or April to be low, but with rising uncertainty linked to developments in the Middle East, the Bank of Japan is likely to adopt a more cautious stance, reducing the likelihood of near-term rate hikes.

• Market pricing for a quarter-point rate hike at the Bank of Japan’s March meeting remains around 15%.

• Pricing for a quarter-point rate hike at the April meeting stands near 40%.

• In the latest Reuters survey, the Bank of Japan is expected to raise interest rates to 1% by September.

• To reassess these expectations, investors are awaiting further data on inflation, unemployment, and wages in Japan.