By COMFORT OGBONNA
The Japanese yen strengthened to a seven-month high against the U.S. dollar on Wednesday as investors sought safety amid growing geopolitical uncertainty and reassessed the outlook for interest rates after oil prices climbed above $100 a barrel.
The yen’s advance came as the widening conflict in the Middle East intensified concerns about global energy supplies and increased fears that higher oil prices could reignite inflation in major economies.
Brent crude, the global oil benchmark, rose nearly 3% on Wednesday, breaking above $100 a barrel for the first time since late July. The move added to pressure on financial markets as investors prepared for upcoming U.S. inflation data that could influence expectations for interest-rate decisions in both the United States and Japan.
The latest escalation in the Middle East has involved attacks across several locations, increasing concerns that the conflict could spread further through the Gulf and threaten energy infrastructure and major shipping routes.
Iran-backed Houthi forces in Yemen launched attacks on several Saudi Arabian cities, drawing one of the region’s largest oil producers deeper into the conflict. At the same time, U.S. forces carried out strikes involving Iranian oil tankers, while Iran attacked a U.S. military base in Jordan.
The developments have increased uncertainty over the future of oil shipments through the region and raised concerns that a prolonged disruption could have consequences for global economic growth.
The dollar weakened modestly against a basket of major currencies, although analysts said the decline was partly linked to the yen’s sharp appreciation over the past week and positioning by investors ahead of several major central bank meetings.
The euro rose about 0.18% to $1.1641, approaching a two-week high as investors anticipated an interest-rate increase from the European Central Bank.
Markets are also focused heavily on U.S. inflation data due Friday. The figures are expected to provide important clues about the Federal Reserve’s next move after stronger-than-expected employment data recently revived expectations that policymakers could raise interest rates.
Higher oil prices could complicate the central bank’s decision-making. Rising energy costs can quickly feed into transportation, manufacturing and consumer prices, potentially making it more difficult for policymakers to contain inflation.
Strategists said higher oil prices and rising bond yields could limit the dollar’s decline in the near term, but a more decisive move in the U.S. currency would likely depend on the inflation figures.
The dollar index, which measures the U.S. currency against a basket of six major currencies, remained close to its lowest level in nearly two weeks.
The yen, however, has emerged as one of the strongest-performing major currencies this month. It has gained about 4% since the beginning of September, forcing investors to reassess popular carry trades that rely on borrowing in Japan at relatively low interest rates and investing the money in higher-yielding currencies and assets elsewhere.
The dollar fell about 0.4% against the yen to around 153.38 yen, remaining close to the seven-month high of 152.89 reached on Tuesday.
The Japanese currency has strengthened broadly, gaining against the euro and British pound as well as against currencies that are often targeted by carry-trade investors, including the Mexican peso and Turkish lira.
Several factors have contributed to the yen’s rapid rise.
Investors increasingly expect the Bank of Japan to tighten monetary policy more quickly, while the possibility that Japanese investors could bring money held overseas back home has also supported the currency.
Pressure from Washington for a stronger yen has added another element to the market’s calculations.
Traders broadly expect the Bank of Japan to raise its policy rate by 25 basis points at its September 17-18 meeting. However, the yen’s next major move could depend heavily on whether Bank of Japan Governor Kazuo Ueda signals further tightening in the months ahead.
The Japanese currency has also been influenced by expectations surrounding U.S.-Japanese financial policy and intervention in foreign exchange markets.
U.S. Treasury Secretary Scott Bessent on Tuesday challenged investors who were betting against the yen, arguing that Washington would have significant insight into Japanese policymakers’ actions should another intervention become necessary.
The comments came after an unprecedented joint U.S.-Japanese intervention in late July aimed at supporting the yen and discouraging excessive weakness in the currency.
The possibility of additional intervention has become an important consideration for currency traders, particularly as the yen’s recent gains have moved the currency rapidly in a short period.
Investors are now closely watching both governments for indications of how far they are willing to go to influence exchange rates and protect financial stability.
The Federal Reserve remains another major uncertainty for global currency markets. Market expectations currently put the probability of a U.S. rate increase next week at about 60%, although that view could change significantly following Friday’s inflation data.
If inflation proves stronger than expected, higher oil prices could reinforce expectations for tighter U.S. monetary policy and potentially support the dollar. A weaker inflation reading, however, could reduce pressure on the Federal Reserve and give the yen and other currencies more room to strengthen.
Elsewhere in currency markets, the Canadian dollar remained relatively resilient despite another escalation in trade tensions between Canada and the United States.
The U.S. government announced restrictions on imports of a broad range of Canadian products, including alcoholic beverages, motorcycles and dairy goods, adding to uncertainty surrounding trade between the two neighboring economies.
The Canadian dollar, commonly known as the loonie, was little changed at around 1.377 Canadian dollars per U.S. dollar, remaining close to a three-week high.
China’s yuan also remained near a three-and-a-half-year high against the dollar after stronger-than-expected inflation data and faster export growth provided support for the Chinese currency.
The moves across major currencies reflect a market increasingly driven by a combination of geopolitical risks, energy prices, inflation expectations and shifting central bank policies.
The biggest concern for investors is that the oil price surge could become persistent rather than temporary. If crude prices remain above $100 a barrel for an extended period, the resulting increase in fuel and transportation costs could place renewed pressure on inflation across major economies.
That could force central banks to maintain higher interest rates for longer, potentially slowing economic activity and increasing borrowing costs for households and companies.
For Japan, the situation presents a particularly complicated challenge. A stronger yen can reduce the cost of imported energy and other commodities, helping to offset some of the impact of higher global oil prices. But a rapidly appreciating currency can also hurt exporters by reducing the value of overseas earnings when converted into yen.
Investors will therefore be watching the yen’s strength, oil prices and central bank signals closely in the coming days.
With Brent crude above $100, the Middle East conflict widening and major central banks preparing to make important policy decisions, financial markets are entering a period of heightened uncertainty in which movements in energy prices and currencies could have far-reaching consequences for the global economy.
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