The Japanese yen fell against a basket of major and minor currencies in Asian trading on Monday, resuming losses against the US dollar after a brief pause on Friday and touching a two-week low.

The currency is moving closer to its weakest level in 40 years as investors increasingly turn to the US dollar as the preferred safe-haven asset amid escalating military strikes between the United States and Iran.

Global oil prices surged to their highest level in six weeks as supplies through the Strait of Hormuz were disrupted, renewing concerns over mounting inflationary pressures on the Bank of Japan and strengthening expectations of a Japanese interest rate hike in October.

The Price

• The dollar rose 0.15% against the yen to ¥162.58, its highest level since July 9, after opening at ¥162.36 and touching a low of ¥162.31.

• The yen ended Friday up less than 0.1% against the dollar, marking its third gain in four sessions amid speculation that Japanese authorities could intervene in the currency market.

• The yen lost 0.45% against the dollar last week, posting its second consecutive weekly decline as military confrontation between the United States and Iran intensified.

Japanese authorities

The yen has returned to the spotlight after moving close to its weakest levels against the US dollar since 1986, raising expectations that Japanese authorities could intervene to protect the currency from excessive depreciation.

US dollar

The dollar index rose around 0.2% on Monday, extending gains for a third consecutive session and reflecting continued strength in the US currency against a basket of global currencies.

Investors are increasingly buying the dollar as a safe-haven asset as military strikes between the United States and Iran continue to escalate, while shipping traffic through the Strait of Hormuz declines.

Global oil prices

Oil prices rose around 3% on Monday, extending gains for a second consecutive session and reaching their highest level in six weeks amid mounting risks in the Middle East and Iranian threats to halt all traffic through the Strait of Hormuz.

The rise in global oil prices is renewing fears of accelerating inflation, which could prompt central banks worldwide to raise interest rates in the near term, marking a sharp reversal from pre-war expectations that rates would either be cut or held steady for an extended period.

Latest developments in the Iran conflict

• The United States launched a fresh wave of airstrikes against targets inside Iran for a ninth consecutive day.

• The US strikes targeted military sites linked to Iran's missile and defence capabilities in an effort to weaken Tehran's ability to control the Strait of Hormuz.

• Iran's Revolutionary Guard launched coordinated retaliatory attacks using ballistic missiles and drones against military bases hosting US forces across the region.

• Iran said that not "a single drop" of oil or gas would pass through the Strait of Hormuz if US military operations continued, escalating threats surrounding one of the world's most important energy routes.

• Shipping traffic through the Strait of Hormuz declined sharply as security risks, inspections, and reciprocal attacks continued.

• The US Navy said it had intercepted and rerouted six commercial vessels and disabled a seventh as part of efforts to enforce a strict naval blockade on Iranian ports and isolate the country's coastline.

Japanese interest rates

• Amid rising global oil prices, markets increased the probability of the Bank of Japan raising interest rates by 25 basis points at its July meeting to more than 30%.

• Expectations of a quarter-point rate hike at the Bank of Japan's October meeting rose above 90%.

• Investors are awaiting further data on inflation, unemployment, and wages in Japan to reassess those expectations.

Oil prices jumped on Friday after Kuwait announced that an Iranian attack had struck a power generation and desalination facility, as military clashes across the Gulf continued to escalate.

Global benchmark Brent crude futures climbed 4.6% to settle at $88.10 a barrel, while US West Texas Intermediate crude futures gained 4.5% to close at $82.49 a barrel.

Kuwait's Ministry of Electricity, Water and Renewable Energy said the attack caused damage to the facility, triggering a fire that affected a large number of electricity generation units, according to the Kuwait Times.

Kuwait relies heavily on desalination plants to supply drinking water, and analysts have long warned that Iran could target critical infrastructure essential to civilian life across the Middle East.

Escalating conflict threatens energy supplies

Iran said it had targeted US positions in Bahrain, Jordan, Kuwait, Oman, Qatar, and Syria in retaliation for the latest wave of US strikes, according to the country's state-run Press TV.

In a separate development, the UK Maritime Trade Operations (UKMTO) said an oil tanker had been struck by a projectile off the coast of Oman, causing minor damage, according to a report issued on Friday.

The agency added that Iran had intensified attacks on oil tankers over the past week in an apparent attempt to force commercial vessels to transit the Strait of Hormuz through waters under its control.

Meanwhile, US Central Command (CENTCOM) said it had completed a sixth consecutive night of airstrikes against Iran, targeting dozens of military sites, including logistics facilities and naval assets.

CENTCOM added that more than 50,000 US troops are currently deployed across the Middle East and remain "fully vigilant and prepared."

The escalation follows the collapse of the fragile ceasefire reached last month, once again disrupting energy flows through the Strait of Hormuz, which normally handles around 20% of global oil trade.

Growing threats raise fears of wider conflict

In an interview with Fox News on Tuesday, US President Donald Trump said American forces would target Iranian infrastructure next week unless the two sides achieved a diplomatic breakthrough.

Iran's senior military leadership responded by warning that if Trump's threats were carried out, "everything that remains standing... all infrastructure across the region will be destroyed," according to a statement published by a military spokesman on Telegram on Thursday.

Separately, three sources told Reuters that Iran had asked Yemen's Houthis to close the Red Sea oil shipping route if the United States attacks Iranian energy infrastructure.

Despite the escalation, Rystad Energy continues to view a limited agreement between Washington and Tehran as the most likely outcome, although confidence in that assessment has weakened, according to Jorge Leon, the company's Head of Geopolitical Analysis.

Leon said both Iran and the United States still have strong economic incentives to avoid a complete collapse in negotiations. Washington wants to keep oil prices under control ahead of November's midterm elections, while Tehran remains reluctant to forgo potential economic gains.

"There is a substantial economic package on the table for Tehran, including access to frozen assets and potential export sanctions relief, benefits that it is unlikely to abandon permanently," he said.

Gold prices headed for their steepest weekly decline in six weeks on Friday as the escalating conflict between the United States and Iran drove oil prices higher, adding to inflationary pressures and strengthening expectations that US interest rates will continue to rise.

Spot gold gained 1.1% to $4,015.09 an ounce after earlier touching its lowest level since July 1.

US gold futures for August delivery rose 0.7% to settle at $4,018.80 an ounce.

Despite Friday’s rebound, the precious metal lost around 3% over the week, marking its biggest weekly decline since the week ended June 1.

The impact of the Middle East conflict outweighed support from weaker-than-expected US inflation data for June released earlier this week.

Rising oil prices strengthen rate expectations

Tim Waterer, Chief Market Analyst at KCM Trade, said gold had begun a cautious recovery after its fall below $4,000 attracted bargain buyers.

Geopolitical risks in the Middle East remained elevated, he said, but inflation concerns and higher bond yields continued to be the main factors limiting gold’s gains.

Oil prices rose around 12% over the week as the intensifying conflict between the United States and Iran fueled concerns over global supplies.

The increase threatens to revive inflation fears and raise the likelihood of further interest rate hikes, placing pressure on non-yielding gold as investors tend to favor assets offering higher returns when borrowing costs rise.

Fed officials strengthen tightening expectations

Dallas Federal Reserve President Lorie Logan became the first new official on Federal Reserve Chair Kevin Warsh’s team to publicly call for an interest rate increase.

Federal Reserve Vice Chair Philip Jefferson also indicated that he would be open to raising rates if inflation failed to show meaningful improvement in the near term.

According to the CME FedWatch Tool, markets are currently pricing in a 73% probability of an interest rate hike at the December meeting.

In physical markets, gold discounts in India widened to their highest level in a month as buyers held back in anticipation of further price declines, while premiums in China remained largely stable.

The results of Armenia’s parliamentary elections in June dealt a major blow to Russia’s efforts to reassert its influence over the South Caucasus, with implications extending well beyond Moscow, Washington, and Brussels.

For Beijing and Tokyo, which have quietly expanded their presence in the region as a land bridge connecting Asia and Europe, the election result reaffirming Prime Minister Nikol Pashinyan’s authority carries considerable geoeconomic importance.

Pashinyan’s decisive victory represented a clear popular rejection of rivals associated with the Kremlin and marked a significant failure of Moscow’s attempt to install a more sympathetic leadership in Yerevan.

It also amounted to a setback for Tehran, which has long been one of Armenia’s strongest supporters because of their shared hostility toward Azerbaijan. Azerbaijan’s largely secular Shia society is viewed as a direct counterpoint to the authoritarian Islamic model promoted by Tehran.

Iran and Russia are bound by defence and security agreements and a regional partnership built largely around resisting Western and Turkish influence, an approach Armenian voters rejected in the election.

With Russia severely weakened by the war in Ukraine and Iran preoccupied with its continuing confrontation with the United States and Israel, the two traditional powers of the South Caucasus are more constrained than at any point in recent decades.

That vacuum is particularly important for Asian economies that have spent the past several years searching for trade routes that do not pass through Russian or Iranian territory.

The Middle Corridor dilemma

Since 2022, China has intensified diplomatic and commercial efforts to support the Middle Corridor, the trans-Caspian route linking China with Europe through Central Asia, the Caspian Sea, the South Caucasus, and Turkey, while deliberately bypassing sanctioned Russian rail networks.

Beijing views the corridor as a safeguard for the Belt and Road Initiative, ensuring that goods can continue flowing westward even if Russia remains under sanctions. It could also serve as a long-term strategic lifeline in the event of a broader confrontation with the West.

Georgia and Azerbaijan have long been central to this plan. Armenia, historically peripheral to such calculations, is becoming increasingly important as Georgia moves closer to Russia.

Notably, a Chinese company recently withdrew from a project to develop a deep-water port at Anaklia on Georgia’s Black Sea coast.

A lasting peace between Armenia and Azerbaijan based on the Trump Route for International Peace and Prosperity would create new options for transporting goods across Armenian territory and strengthen the stability of the wider corridor on which Chinese logistics companies and state planners increasingly depend.

Such an arrangement, however, would largely be shaped by Washington rather than Beijing, a formula China is unlikely to welcome despite benefiting from the added stability.

Beijing is therefore expected to continue making discreet infrastructure investments across Central Asia and the Caucasus to preserve its influence over the corridor’s future, while allowing Washington to bear the diplomatic cost of mediating peace.

For Japan, the objective is less about competing with the Belt and Road Initiative and more about diversifying supply chains.

Tokyo has worked in recent years to deepen ties with Central Asian countries through the Central Asia plus Japan framework, seeking to reduce dependence on China-dominated trade routes and diversify access to critical minerals and energy resources.

A more stable South Caucasus, with a lower risk of renewed conflict between Armenia and Azerbaijan and fewer opportunities for Russian or Iranian disruption, would make the land bridge to Europe and the Gulf more attractive to Japanese trading companies and manufacturers seeking to reduce their exposure to Russian and Chinese corridors.

Iran’s declining position makes this shift even more significant.

Despite its limited role, Tehran has served as an alternative transit and energy partner for Asian economies seeking to avoid complete dependence on Gulf maritime routes through the Strait of Hormuz.

But Iran, facing growing pressure along its northern borders and increasing isolation in the Gulf, has become a less reliable partner in that role.

This is encouraging energy planners across Asia, including in Beijing despite China’s 25-year strategic partnership with Tehran, to accelerate the diversification of overland routes through the Caucasus and Central Asia.

The battle over constitutional reform

None of these scenarios, however, is guaranteed. Armenia’s election result marks the beginning of a new process rather than its conclusion.

Pashinyan’s Civil Contract party secured 49.8% of the vote, winning 64 of the 105 seats in parliament. It retained its majority but fell short of the two-thirds threshold required to amend the constitution, complicating efforts to conclude a final peace agreement with Azerbaijan.

Azerbaijan has made its approval of a peace treaty conditional on constitutional changes in Armenia removing any language that could be interpreted as a claim over Nagorno-Karabakh, which Baku regained control of in 2023.

The Armenian constitution contains no direct claim to Azerbaijani territory. The dispute instead concerns its preamble, which endorses the principles and aspirations of the 1990 Declaration of Independence.

That document explicitly refers to a December 1, 1989 decision on the “reunification” of Armenia and Nagorno-Karabakh, a territory internationally recognised as part of Azerbaijan.

As a result, Armenia’s constitutional framework remains linked to a founding document that contains a claim over internationally recognised Azerbaijani territory.

Without constitutional reform, any peace agreement could be overturned by a future government, undermining the long-term stability that Asian economies dependent on transport corridors would require before committing substantial investment to the region.

The author argues that constitutional reform would be neither exceptional nor unprecedented, noting that numerous countries have amended their fundamental laws in pursuit of peace or strategic objectives.

Ireland amended its constitution as part of the Good Friday Agreement, creating a cornerstone of the peace settlement with the United Kingdom.

Greece similarly insisted for years on constitutional changes in Macedonia, eventually leading to the Prespa Agreement and paving the way for North Macedonia to join European and transatlantic institutions.

The most realistic path for Pashinyan, the author argues, would be to form a narrow coalition focused exclusively on peace-related provisions, presenting them as technical requirements for international normalisation rather than partisan concessions.

His success in securing the additional votes will determine whether Armenia’s westward orientation and the broader opening of the South Caucasus corridor become irreversible.

For Asian governments and companies assessing Eurasian trade, energy, and mineral routes over the next decade, Armenia’s constitutional dispute is not merely an internal matter in a former Soviet republic.

It is a genuine test of whether one of the few remaining alternative corridors between Asia and Europe can achieve lasting stability and of which powers will ultimately establish its rules.

China and Japan both have strong incentives for the peace process to succeed, despite their limited ability to control its direction.

Moscow is already working to obstruct it, while Tehran watches with concern.

The author concludes that Beijing and Tokyo should follow developments with equal attention and work toward a South Caucasus finally capable of serving as a stable and effective trade corridor.