Dollar Climbs as Fed Holds Amid Geopolitical Risks

Key Moments

USD/JPY trades near 163.50 in Thursday’s Asian session as the Dollar gains on a hawkish Federal Reserve hold.
The Fed kept rates at 3.50%-3.75% in July with a 9-3 vote, while the BoJ is expected to leave policy unchanged on Friday.
Strategists highlight that a BoJ “hawkish hold” could fuel expectations for further tightening and support the Yen.

USD/JPY Edges Higher After Fed Decision

USD/JPY is trading modestly higher around 163.50 during Thursday’s Asian session, with the US Dollar (USD) firming against the Japanese Yen (JPY) after the latest Federal Reserve policy announcement. The move comes ahead of a closely watched Bank of Japan (BoJ) policy decision scheduled for Friday, where markets widely anticipate no change in the current interest rate setting.

At its July meeting on Wednesday, the Federal Reserve voted 9-3 to keep its benchmark interest rate unchanged in a target range of 3.50% to 3.75%. The outcome, broadly anticipated by markets, was accompanied by signals of a more hawkish tone, citing ongoing inflation pressures and higher energy costs. The three dissenting votes in favor of a rate hike are seen as increasing the likelihood of a potential move in September.

Fed Chairman Kevin Warsh said during the press conference that while the Fed won’t provide hints on where rate policy is heading, it will take necessary steps to meet its 2% inflation target.

Middle East Tensions Add Support to the Dollar

In parallel, geopolitical developments are providing an additional underpinning for the Greenback. Rising tensions in the Middle East are viewed as supportive for the USD against the JPY. According to The Guardian, the US military began launching strikes against Iran late Wednesday in retaliation for Iranian missile attacks on American forces in the region. Iranian media reported that US forces targeted the south-western city of Abadan as well as Qeshm Island.

Focus Turns to BoJ Policy Announcement

Attention now shifts to the BoJ, which is due to release its interest rate decision on Friday. Market participants expect the Japanese central bank to leave its policy rate unchanged at 1.0% at its July meeting. However, investors are also watching for any hawkish nuances in the communication that might leave room for additional tightening later.

“The BOJ is likely to maintain its view that risks to the price outlook are skewed to the upside,” said analysts at Mitsubishi UFJ Morgan Stanley Securities. “The timing could be pushed forward to September or October if the BOJ heightens alarm over an inflation overshoot or if relentless yen falls lead the administration to judge a rate hike is inevitable,” they said.

Risk Skewed Toward Yen Strength if BoJ Turns Hawkish

Strategists at Scotiabank note that risks into the end of the week are tilted toward further Yen strength, with policy developments in Japan seen as a critical driver. They “see considerable risk into the end of the week, and note the potential for domestically-driven strength if BoJ policymakers deliver a hawkish hold and seek to build on the 25bpts of tightening (by December) currently priced into the short-term rates market,” underscoring that even an unchanged rate decision paired with more assertive guidance could reinforce expectations for additional tightening and support the JPY.

Policy Backdrop Overview

Institution	Latest Decision / Status	Key Details
Federal Reserve (Fed)	Rates held at 3.50%-3.75%	9-3 vote at July meeting; dissents favored a hike, signaling a hawkish tilt and keeping a potential September move in focus.
Bank of Japan (BoJ)	Decision due Friday	Market expects rates to remain at 1.0%, with possible hawkish communication that could leave room for further tightening.

Japanese Yen: Key Market Drivers

Core Influences on JPY

The Japanese Yen (JPY) is among the most actively traded currencies globally. Its valuation is shaped by the overall performance of the Japanese economy and, more specifically, by the policy stance of the Bank of Japan, yield differentials between Japanese and US government bonds, and broader risk sentiment in financial markets, among other factors.

Impact of BoJ Policy Actions

One of the Bank of Japan’s mandates is currency control, making its policy decisions particularly important for the Yen. The BoJ has at times intervened directly in foreign exchange markets, typically to weaken the Yen, although it generally avoids frequent intervention due to political sensitivities with key trading partners.

The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

Role of Yield Differentials

Over the last decade, the BoJ’s commitment to ultra-loose policy has contributed to a widening gap between Japanese bond yields and those of other major economies, particularly the United States. This divergence, especially between 10-year US and Japanese government bond yields, has tended to favor the US Dollar over the Japanese Yen.

The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

Safe-Haven Dynamics

The Japanese Yen is often perceived as a safe-haven asset. During episodes of market turmoil, investors typically increase allocations to the Yen, attracted by its perceived stability and reliability. As a result, periods of heightened market stress are likely to strengthen the Yen relative to currencies that are considered riskier.