MUFG head of research Derek Halpenny notes that the US dollar has seen further gains as markets focus on potential US military action against Iran. He highlights that the USD/JPY pair has gained strength in the past on similar events, but improved JGB sentiment and stable yields in Japan could limit further weakness in the Japanese yen.

Iran risk and Japanese policy background

“The U.S. dollar gained slightly on focus on the risk of an imminent U.S. attack on Iran as its military presence in the region increases.”

“In the run-up to the US attack on Iran last year (June 22), crude oil rose almost 20% in the eight trading days prior and the dollar rose just over 1.0%.

“The move is not as big for crude oil yet, but similar for currencies, and given the late entry into the FX market, we can certainly see a scenario for further near-term gains.”

“Then USD/JPY saw a particularly sharp move – particularly on Monday in response to the attack, with USD/JPY rising by approximately 3.5% in the eight days following the attack.”

“Still, the stability of the JGB market could help deter yen selling in response to rising geopolitical risks.”

(This article was created with the lend a hand of an artificial intelligence tool and has been reviewed by an editor.)