Why is the Yen weakening against the Dollar despite hopes of a US-Iran deal?

USD/JPY stays near its highest level since 29 October after touching 158.00.
A recovery from the pair's low follows a stronger-than-expected ISM manufacturing reading.
September wage figures precede BoJ Governor Ueda's Friday address at the IMF by a day.

USD/JPY advanced to 158.00, its strongest level since 29 October, as the Yen failed to benefit from the Dollar's decline against the Euro and the Pound amid US-Iran diplomacy. At the height of the Dollar's losses elsewhere, the pair retreated to just above 157.50 before recovering to its high. It now trades just below 158.00.

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Despite lower Crude Oil prices following the US-Iran talks reducing Japan's import bill, the Yen still weakened. Japan sources almost all its Crude Oil from overseas. With the Bank of Japan (BoJ) not due to take its next policy decision until 17-18 December, no scheduled change to the Japanese side of USD/JPY's interest-rate differential is expected for more than six weeks.

S&P Global's final US manufacturing reading dropped from 56.0 to 54.9, prompting USD/JPY to retreat to just above 157.50. A subsequent rise in the Institute for Supply Management (ISM) manufacturing survey to 55.5, exceeding the 54.6 forecast, helped the pair recover to just below 158.00.

Which releases could shape the rate outlook?

The BoJ's December decision will draw on three upcoming events, starting with the release of its meeting minutes on Wednesday at 23:50 GMT. September wage figures arrive on Thursday at 23:30 GMT, with annual growth forecast to remain at 3.8% for a second month. On Friday, BoJ Governor Ueda will deliver a lecture at the International Monetary Fund (IMF) at 16:00 GMT.

Following the Fed's decision on 28 October to leave rates at 3.75%-4.00%, two US releases will also influence USD/JPY's interest-rate differential. Wednesday brings the ISM services index at 15:00 GMT, with a reading of 54.8 expected against the previous 54.9. Friday's October payrolls report is scheduled for 13:30 GMT, with the forecast at 65K compared with 29K previously.

What does the USD/JPY chart show?

Following a recovery from September's low just below 153.00, USD/JPY has traded in a band extending from just above 156.00 to close to 159.00 since late September. Within that range, the 50-day and 200-day Exponential Moving Averages (EMA) sit less than a fifth of a yen apart. Repeated crossings of both averages have occurred since early October.

USD/JPY chart: 5-minute view

USD/JPY chart: daily view

Japanese Yen: frequently asked questions

Which factors influence the Japanese Yen most?

Among the most actively traded currencies globally, the Japanese Yen (JPY) takes its broad direction from Japan's economic performance. More specific influences include Bank of Japan policy, the gap between Japanese and US bond yields, and traders' appetite for risk, alongside other factors.

Why do Bank of Japan decisions matter for the Japanese Yen?

Currency control forms part of the Bank of Japan's mandate, making its actions an important influence on the Yen. Although the BoJ has occasionally intervened directly in currency markets, usually to weaken the Yen, political concerns among Japan's main trading partners discourage frequent intervention. Between 2013 and 2024, its ultra-loose monetary stance pushed the Yen lower against other major currencies as the policy gap between the Bank of Japan and other leading central banks widened. The more recent gradual withdrawal of that ultra-loose stance has offered the Yen some support.

Why does the Japanese-US bond yield gap matter for the Yen?

By maintaining ultra-loose monetary policy over the past decade, the BoJ moved increasingly out of step with other central banks, especially the US Federal Reserve. That divergence helped widen the yield gap between 10-year US and Japanese bonds, favouring the US Dollar over the Japanese Yen. The gap is now narrowing as the BoJ's 2024 decision to withdraw gradually from ultra-loose policy coincides with interest-rate reductions by other major central banks.

How does market risk appetite influence the Japanese Yen?

Investors often regard the Japanese Yen as a safe-haven asset, turning to it during periods of market strain because of its perceived dependability and stability. As a result, turbulent conditions are likely to lift the Yen against currencies considered riskier investments.