The dollar-yen currency pair trades around 157.50 on Monday, with the USDJPY up 0.84% on the day, moving closer to the February high at 157.66 and maintaining a bullish tone supported by the strength of the US dollar.
The greenback benefits from a marked increase in risk aversion amid escalating military tensions involving the US, Israel and Iran. The DXY Dollar Index, which measures the dollar against a basket of six major currencies, rises firmly and supports dollar-denominated pairs.
Demand for safe-haven assets intensifies as the Middle East war fuels concerns about a prolonged conflict, strengthening the US currency.
On the Japanese side, the yen shows relative resilience, supported by its own safe-haven status.
However, the advance in USDJPY pair indicates that dollar strength currently outweighs defensive flows into the Japanese currency.
Comments from Bank of Japan Deputy Governor Ryozo Himino maintain the prospect of additional monetary tightening. He noted that the BoJ could continue to gradually raise interest rates toward a neutral level if economic and inflation projections materialise, even if headline inflation temporarily falls below the 2% target.
These remarks come as recent data show a slowdown in core inflation in Tokyo, reviving questions about the exact timing of the next rate hike.
BoJ Governor Kazuo Ueda recently reiterated that the institution stands ready to adjust policy if price and growth outlooks strengthen, leaving the door open to a gradual normalization process.
In the U.S., market attention now turns to a data-heavy week.
The ISM Manufacturing Purchasing Managers Index (PMI) for February is expected to ease slightly to 51.8 from 52.6 previously, while remaining in expansion territory. Sub-components related to Employment, New Orders and Prices Paid will be closely monitored to assess the strength of industrial activity and its implications for the path of the Federal Reserve.
More broadly, investors are preparing for heightened volatility ahead of key labour market releases, including the non-farm payrolls (NFP) report scheduled later this week.
Weaker-than-expected figures could revive expectations of monetary easing from the Fed and weigh on the US dollar, while robust data would reinforce the case for a prolonged restrictive stance, potentially supporting USDJPY.
(Source: OANDA)
