Is the Japanese Yen’s Exchange Rate Dominated by the US Dollar and Headed for 160?

The yen’s exchange rate against the US dollar is being influenced by the situation in the Middle East and oil prices. With expectations of a prolonged conflict intensifying, the prevailing sentiment of “buy the dollar in times of turmoil” is driving a sell-off of the yen. For the first time in three months, speculative funds have turned net buyers of the US dollar against major currencies.

Furthermore, concerns about a widening trade deficit mean that rising oil prices and yen depreciation often occur simultaneously. The possibility of the yen falling to the 160 yen/dollar range is once again in sight.

There are no major economic data releases or significant economic events this week. On March 23, the yen hovered around 159 yen/dollar in the Tokyo foreign exchange market. It is expected to continue to be affected by the situation in the Middle East and oil prices. Shinichiro Kadona, head of the foreign exchange and bond research department at Barclays Securities, stated, “The market is strongly aware of the psychological threshold of 160 yen/dollar.”

Current yen exchange rate fluctuations are less driven by the yen itself and more by the US dollar. Amid market concerns about a protracted Middle East conflict and persistently high resource prices, the trend of funds flowing into the highly liquid US dollar has intensified. This has created a situation where the dollar is being bought while the yen is being sold off.

According to data calculated by Mizuho Bank of Japan based on data from the US Commodity Futures Trading Commission (CFTC), hedge funds and other non-commercial sectors (speculative funds) have net purchases of $6.2 billion (approximately 980 billion yen) in the US dollar against eight major currencies, as of March 17. This marks the first time in about three months since early December 2025 that net purchases have occurred.

On March 20, when the yen weakened against the dollar, the “dollar index,” which reflects the overall strength of the dollar against major currencies, briefly rebounded to the 99.5-99.9 range. Reports indicated that the US Department of Defense was preparing to deploy ground troops, suggesting that the market may have already recognized the protracted nature of the conflict. Conversely, on March 19, when the yen’s appreciation intensified, the dollar index fell, resulting in a situation where the yen appreciated while the dollar depreciated.

Rising crude oil prices, coupled with inflation concerns and waning expectations of US interest rate cuts, have driven the yen’s depreciation. CME Group’s FedWatch tool showed that as of the evening of March 23, the probability of the Federal Reserve maintaining interest rates unchanged this year was in the 40% range, while the probability of more than one rate hike exceeded 50%. At the beginning of the year, two to three rate cuts were expected. Because the market believes the interest rate differential between Japan and the US will not narrow as expected, the yen’s depreciation against the dollar is likely to intensify.

On March 20, comments from Federal Reserve Governor Waller attracted market attention. He voted against delaying rate cuts at the January meeting, but joined the majority of members at the March meeting, choosing to maintain rates. He cited the changing environment caused by the situation in Iran as the reason for this change in stance. The yield on the US 2-year Treasury bond, which easily reflects monetary policy, rose to its highest level in about seven months.

The general view is that for Japan, which relies on energy imports, a deteriorating trade balance will trigger yen selling on the real demand side. Hiroshi Suzuki, chief foreign exchange strategist at Sumitomo Mitsui Banking Corporation, stated, “As long as oil prices rise, the yen will be sold off, and the dollar will be bought.”

Looking at speculative short positions in the yen, as of March 17, the net short position against the dollar was 67,780 contracts (approximately 840 billion yen), an increase of over 60% from the previous week. Compared to the peak in July 2024 when the Japanese government and the Bank of Japan (central bank) intervened in the foreign exchange market by buying yen (184,223 contracts, approximately 2.3 trillion yen), the net short position is relatively small, meaning there is still room for further increases in yen short positions.

The movement of actual demand is also attracting attention. Since the end of March is the end of the accounting period and fiscal year, corporate transactions are often more active. Some believe that “domestic import companies in Japan postponed their purchases of dollars, and at the end of the month, there is a tendency for funds to flow towards selling yen and buying dollars” (Keiichi Iguchi, senior strategist at Resona Holdings, a subsidiary of Mizuho Holdings).

As the yen depreciates further against the dollar, market concerns about foreign exchange intervention may intensify again. Before Japan’s intervention in July 2024, the exchange rate had approached 162 yen to the dollar. Shinichiro Kadota of Barclays Securities stated, “There is certainly concern about foreign exchange intervention, but the yen may slowly depreciate to around 160 yen to the dollar, or even 162 yen.”