The US dollar strengthened against the Japanese yen on Thursday, briefly trading above 159.00, as rising tensions between Washington and Tehran over maritime routes near the Strait of Hormuz weighed on risk appetite and supported demand for the greenback.
The move marked a rebound from earlier losses in the pair and unfolded during the European session, when the dollar also advanced against several major currencies. Traders cited renewed geopolitical uncertainty as a key factor limiting confidence in ongoing diplomatic efforts.
Iran threatens shipping routes, volatility picks up
Iranian officials warned they could obstruct shipping lanes in the Gulf of Oman and the Red Sea if the United States maintains restrictions on Iranian ports. The warning follows a US naval blockade of Iranian ports earlier in the week, during which American warships reportedly turned back at least six merchant vessels.
The standoff in a region that handles roughly one-fifth of the world’s oil trade has reintroduced significant tension into energy and currency markets after a period of relative calm.
Wall Street’s main fear gauge, the CBOE Volatility Index (VIX), has risen 11% over the past three sessions to just below 28, signaling increased demand for downside protection as traders brace for potential market swings amid uncertain diplomatic and military outcomes.
Diplomatic signals from Washington and the region
Earlier in the week, President Trump said talks with Tehran were continuing and left the door open to further negotiations. At the same time, Israeli officials announced that Prime Minister Benjamin Netanyahu plans to meet Lebanese President Michel Aoun, a development that could influence broader regional stability.
Despite these diplomatic gestures, markets have largely focused on the immediate risks to energy flows and shipping security, lending support to the dollar in a cautious, risk-off environment.
Tokyo–Washington coordination on FX, muted market reaction
In Japan, Finance Minister Takayama said Tokyo and Washington agreed to strengthen communication on exchange rates after talks with US Treasury Secretary Bessent. The comments underscored authorities’ readiness to address sharp moves in the yen.
Market response, however, was subdued, with traders viewing the remarks as a reiteration of existing policy rather than a signal of imminent action.
US data and Fed comments reinforce dollar backdrop
US economic indicators added to the dollar’s support. The Philadelphia Fed Manufacturing Survey for April came in at 9.7, slightly above expectations of 9.0, suggesting a resilient manufacturing sector and consistent, if modest, growth momentum.
Industrial production figures for March were also in focus, while comments from Federal Reserve officials helped shape short-term rate expectations. New York Fed President John Williams said monetary policy is “well positioned” to respond to incoming data, and noted that elevated energy prices could filter through to core inflation over the coming year. His remarks underlined a data-dependent stance and little inclination to shift course solely on the latest geopolitical flare-up.
Board member Miran’s scheduled remarks were also watched for any hint on how sustained energy price pressures might affect the Fed’s outlook.
Yen dynamics: yield gap, policy shift and safe-haven role
The yen remains driven primarily by Bank of Japan policy, interest rate differentials with US bonds and broader market sentiment. The BoJ’s gradual move away from its ultra-loose stance, in place from 2013 to 2024, has offered the yen some support after years of depreciation tied to policy divergence with the Federal Reserve.
A narrower yield spread between Japanese and US government bonds this year has helped ease some downward pressure on the currency. Even so, in episodes of heightened geopolitical tension such as the current one, the yen’s traditional safe-haven status continues to be a key factor in its performance against the dollar, sometimes countering rate-driven flows.
Risk-off mood tightens conditions for risk assets
The combination of a firmer dollar, safe-haven demand and steady US data has created a challenging backdrop for assets priced in dollars and for markets that rely on stable risk sentiment.
The prevailing risk-off tone is driving a flight to quality, as traders prioritize capital preservation over speculative exposure. That shift is reducing liquidity in higher-volatility asset classes and amplifying sensitivity to further headlines out of the Gulf and from central bank officials.
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