The USD/JPY pair rallied 0.15% to near 157.60 on Tuesday, extending gains amid escalating Middle East conflict that shut the Strait of Hormuz and hammered Japan’s import-dependent economy. Oil prices spiked above $79 per barrel, amplifying yen weakness against a safe-haven dollar bid.
Market Snapshot
S&P 500 E-Mini futures (ESH26) plunged 1.77% in early Asian trade amid inflation fears driven by surging energy costs. Japan’s Nikkei 225 tumbled in its largest daily drop since January 18, with auto and mining stocks leading the losses amid higher fuel import costs. Brent crude (LCOc1) jumped over 8% to test $80, while 10-year US Treasury yields (US10YT) held steady near 4.20% amid Fed pause signals.
Conflict Escalation
Iran’s strikes prompted a Strait of Hormuz blockade, choking 20% of global oil flows and hitting Japan hardest as a nation reliant on imported fuel. Israel advanced into southern Lebanon against Hezbollah, while President Trump vowed retaliation after attacks on US assets, Secretary of State Marco Rubio warned of tougher measures ahead. QatarEnergy halted output, sending European gas prices up a third to 140p per therm.
Yen Policy Urgency
Japanese Finance Minister Satsuki Katayama voiced a “strong sense of urgency” over yen depreciation, coordinating with the US while keeping intervention on the table. BoJ’s Hajime Takata flagged inflation overshoot risks and urged hikes, with Governor Kazuo Ueda calling March-April meetings “live” despite PM Takaichi’s reflationist board picks. JGBs sold off as traders priced in faster tightening to combat imported inflation.
Dollar Safe-Haven Strength
The dollar drew flows as a haven, bolstered by Fed minutes showing rate-hike talk if inflation persists, markets see no cuts soon with the band at 3.50%-3.75%. USD/JPY held above its 50-day EMA at 155.50 in a bullish uptrend, eyeing resistance at 158.50 then 160.00. “The yen’s vulnerability to energy shocks makes USD/JPY a clear winner here, we’re buying dips toward 156,” said Joshua Gibson, FXStreet analyst.
Broader Asset Flows
Risk-off sentiment drove gold (XAU) up 1.2% to $2,650/oz and the euro (EURUSD) down 0.4% below $1.08, while commodity currencies like the Aussie dollar weakened on oil-led growth worries. US equities partially recovered but closed lower, with S&P 500 off 0.94% and Nasdaq down 1.02% on inflation jitters. “Prolonged Hormuz closure could push oil north of $100, derailing soft-landing hopes and pressuring global growth,” noted Aaron Hill, chief market analyst at FP Markets.
Macro Implications
The energy shock risks reaccelerating global inflation, complicating Fed and BoJ paths amid divergent policies. Japan’s fuel import bill surges threaten its fragile reflation, potentially forcing BoJ hikes that widen US-Japan yield gaps further. Equity selloffs signal growth slowdown fears, with correlated FX moves underscoring dollar dominance in crises.
Traders monitor Strait de-escalation signals, next US CPI data on Thursday, and any BoJ intervention hints. Oil inventory reports and Israeli-Iran rhetoric will dictate near-term flows.
