Yen nears 40-year low, dollar gains as peace talks in doubt

The US dollar is flexing its muscles against the Japanese yen, much to the attention of market traders. The potential for a US-Iran peace agreement looms large as Japan's currency hovers at a low not seen in years. With the Bank of Japan increasing interest rates, concerns over government spending are rattling investor confidence.

Market Trends

The dollar strengthened in Asian trade on Friday, pinning the yen near a four-decade low as a peace deal between the U.S. and Iran hung in the balance and traders speculated further intervention may be needed to arrest a slide in the Japanese currency.

The Japanese currency reversed earlier strength to trade flat against the U.S. dollar at 161.455 yen, grinding closer to its weakest level in two years, though public holidays in China, Hong Kong and Taiwan and an impending one in the U.S. kept liquidity thin.

Currency Intervention

The U.S. dollar index, which measures the greenback's strength against a basket of six currencies, rose 0.3% to a one-year high of 101.07 after U.S. Vice President pulled out of a planned trip to meet Iranian negotiators in Switzerland on Friday.

They had been set to begin complex talks on implementing the 14-point agreement struck between Tehran and Washington to end their war.

"Markets will be watching closely to see how implementation and the tougher follow-up negotiations develop in the coming days," Danske Bank analysts wrote in a research report.

Global Market Impact

The British pound was down 0.2% at $1.3174, moving in line with weakness in most other currencies and little changed after Greater Manchester Mayor Andy Burnham triumphed in a by-election in Makerfield.

That set the stage for a likely challenge to Prime Minister Keir Starmer for the leadership of the ruling Labour Party.

Inflation Concerns

Japan's annual core inflation stayed below the central bank's 2% target for a fourth straight month in May, data showed on Friday, as fuel subsidies offset rising raw material costs from the Middle East conflict.

"While the government's fuel price caps have so far kept a lid on consumer prices, we expect the pass-through of higher energy costs to utilities charges and other goods and services to lift inflation to around 3.5% by early-2027," analysts from Capital Economics wrote in a research note.

Minutes from the central bank's meeting in April released on Friday morning and comments soon after from BOJ Deputy Governor Ryozo Himino also cautioned there could be more rate hikes tied to the inflationary effects of the Iran war.

Source: The Times of India