The USD/JPY appreciates as divergent perspectives within the Bank of Japan regarding prospective rate increases maintain downward pressure on the Yen. Japan recorded an unforeseen current account deficit of JPY 92.3 billion in June, marking its first deficit in 17 months, attributed to substantial foreign dividend payouts. Escalating tensions between the US and Iran have strengthened the Dollar, resulting in an upward movement of the USD/JPY pair. USD/JPY gains ground after registering modest losses in the previous day, trading around 158.20 during the Asian hours on Monday. The pair remains robust as the Japanese Yen continues to experience losses subsequent to the publication of the Bank of Japan’s Summary of Opinions from its monetary policy meeting held on July 30–31. The summary indicated a distinct split among board members; some supported keeping interest rates unchanged to assess the delayed effects of earlier rate increases, while others argued for sustaining or even intensifying the tightening cycle, referencing increasing upside risks to inflation. Despite members noting that tensions in the Middle East are impacting economic activity, they emphasised that strong demand related to AI and a moderately recovering domestic economy continue to serve as a counterbalance. In June, Japan experienced its inaugural current account deficit in 17 months, a development attributed to substantial dividend distributions to foreign investors who have been actively investing in domestic markets.
According to Finance Ministry data released Monday, the deficit reached JPY 92.3 billion, significantly deviating from the median forecast of a JPY 1.51 trillion surplus in a Reuters poll, and marking a sharp decline from a JPY 1.28 trillion surplus recorded a year earlier. The USD/JPY pair rises as the US Dollar continues to draw support from broad risk aversion. Geopolitical tensions persist as the ongoing US-Iran conflict approaches a pivotal diplomatic juncture, characterised by heightened military activities and strategic pressures in the Strait of Hormuz, which are fostering a climate of market caution. Despite Iranian officials indicating on Sunday that negotiations mediated by Oman concerning the management of the strait are advancing, the demand for the Greenback as a safe haven continues to be robust. According to TD Securities, the risk of another Fed hike “lingers,” but the bank argues that upcoming inflation data could be pivotal for rate expectations. The team notes that their projections for this week’s CPI — “core and headline CPI this week (0.20% m/m and 0.15% m/m, respectively)” — would “likely lead to further pricing out of hikes.” With “the majority of the recent move higher in rates driven by Fed expectations,” TD Securities adds that “rates could move lower as hikes are priced out.”
Fed’s Musalem conveyed a slightly more hawkish stance, as indicated by the FXS Speechtracker score of 7.4, compared to a historical baseline of 7.0. This reflects apprehension that inflation expectations might jeopardise their stability, despite being characterised as stable and in line with the 2% target at present. Emphasis on core inflation amid energy volatility, a preference for incremental rate hikes, and an assessment that core inflation likely sits between 2.5% and 3%—alongside a stated willingness to surprise markets when needed—reinforce a bias toward tighter policy and a higher-for-longer stance. The assertion that the Dollar’s reserve status is not under threat and that the United States remains the fastest-growing, most innovative economy with strong rule of law further supports a constructive backdrop for the Dollar, especially as financial conditions are still seen as highly accommodative and many asset prices remain elevated.
The FXS Fed Sentiment Index remained stable, holding at a hawkish 138.69 with no change in points. This indicates that, despite a speech score slightly above baseline, the overall policy tone continues to be consistently restrictive rather than newly intensified. With the index firmly above the neutral 100 mark and aligned with the elevated FXS Speechtracker reading, markets are likely to interpret Musalem’s remarks as reinforcing existing expectations for a cautious, data-dependent path that leans toward additional tightening if inflation fails to move sustainably closer to the 2% target.