Yen Teeters Near 40-Year Low as Dollar Rides Fed and Iran Uncertainty

The dollar held steady on Friday, pinning the yen near its weakest level since 1986. The greenback touched 161.8 yen late Thursday, a hair below July 2024's 161.96. A move above that would be the strongest yen in 40 years. Traders are braced for another round of Japanese intervention after the Bank of Japan stepped in during late April and early May.

The dollar index rose 1% this week to a 13-month high, partly on fresh projections from the Federal Reserve. Nine of 19 Fed officials now expect a rate hike by year end, the clearest signal yet that the easing cycle may be over. That helped the dollar add to gains from earlier in the week.

The yen is under pressure from Japan's interest rates, which remain low relative to other major economies even after the BOJ raised rates to a 31-year high. The rate gap keeps the carry trade alive. A U.S.–Iran peace deal also hangs in the balance; a breakthrough could ease geopolitical risk and trim the dollar's safe-haven bid, while a failure would reinforce it.

Francesco Pesole, currency strategist at ING, said the dollar could enjoy “post-Fed enthusiasm for a bit longer” as markets price two hikes by December. He noted the U.S. holiday creates thin liquidity, “a window during which Japanese authorities have previously shown a preference to intervene.”

“(Dollar/yen) is already deep into intervention territory. A lack of intervention today would leave scope for speculators to push towards 162-163 given the supportive (dollar) environment,” Pesole wrote.

The next move depends on whether Japan steps in. A break above 161.96 could send the pair to 162-163, Pesole said. If the authorities do intervene, expect a sharp but short-lived reversal – the playbook from April and May.