Dollar climbs past 157 yen after inflation shocks markets

Wednesday 13 - 14:34

By: Dakir Madiha

Dollar climbs past 157 yen after inflation shocks markets

The U.S. dollar surged against the Japanese yen on Tuesday, with the USD/JPY pair rising to 157.60 after stronger than expected U.S. inflation data reinforced expectations that the Federal Reserve could keep interest rates higher for longer. The move accelerated as geopolitical tensions linked to the fragile ceasefire discussions between Washington and Tehran added pressure on the yen and lifted energy prices. The currency reaction came shortly after U.S. Treasury Secretary Scott Bessent and Japanese Finance Minister Satsuki Katayama met in Tokyo to reaffirm their opposition to excessive foreign exchange volatility, a stance that gives Japan political room for further currency intervention if needed.

New figures from the U.S. Bureau of Labor Statistics showed that the consumer price index rose 0.6% in April on a seasonally adjusted basis, pushing annual inflation to 3.8%, the highest level since May 2023 and slightly above market expectations. Energy prices climbed 17.9% year over year and accounted for more than 40% of the monthly increase. Core inflation, which excludes food and energy, increased 0.4% during the month and 2.8% annually. The stronger inflation reading led traders to increase expectations for another Federal Reserve rate hike later this year, with market pricing implying roughly a 30% probability before year end.

The inflation surge has become closely tied to instability in the Middle East. President Donald Trump said the ceasefire between the United States and Iran was on “life support” as negotiations over Tehran’s nuclear program deteriorated. Washington has demanded major reductions in Iran’s nuclear activities, while Tehran has insisted on reopening the Strait of Hormuz before resuming talks. Oil markets reacted sharply. Brent crude traded above $105 per barrel on Tuesday while West Texas Intermediate hovered near $99. Both benchmarks had already gained about 2.8% in the previous session. U.S. gasoline prices rose 28.4% from a year earlier, adding further inflation pressure.

Japanese authorities now face renewed challenges in defending the yen. The Ministry of Finance is believed to have spent nearly 10 trillion yen, or around $67 billion, intervening in currency markets since late April. Operations reportedly took place on April 30 and during the Golden Week holiday period in early May. Those actions briefly strengthened the yen to 155.02 per dollar on May 7, but the gains quickly faded as structural pressures returned. The wide interest rate gap between the United States and Japan, combined with rising Japanese energy import costs, has continued to weaken the currency.

After Tuesday’s meeting, Katayama said both governments were fully aligned on recent currency fluctuations and that Japan’s position had received complete support from Washington. Bessent stated that both sides agreed excessive volatility was undesirable and pledged continued coordination with Japanese officials. Markets interpreted the comments as diplomatic backing for unilateral Japanese intervention, though not a signal of coordinated dollar selling by both governments.

Attention has also shifted toward the next policy decision from the Bank of Japan. Minutes from the central bank’s April 27 and 28 meeting showed several board members favoring another rate increase soon, with one explicitly mentioning June as a possible timeline. The board voted 6 to 3 to keep the benchmark rate at 0.75%, the most divided decision since 2016. Interest rate swaps now indicate a 77% probability of a Bank of Japan rate increase during the June 15 and 16 meeting, as policymakers respond to rising inflation driven by higher oil prices and persistent weakness in the yen.