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Dollar hits fresh 40-year high versus yen, edges down against euro

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July 23 : The dollar edged lower against the euro ahead of the European Central Bank’s policy meeting on Thursday and reached a fresh 40-year high versus the yen, as investors remained focused on the escalating conflict in the Middle East.

Oil prices rose for a fifth day on Thursday amid attacks on tankers in the Red Sea by Yemen’s Houthis, while the U.S.-Israeli war on Iran has nearly shut the Strait of Hormuz. 

The greenback has found support as markets rein in expectations for U.S. rate cuts, with the American economy’s lower vulnerability to energy shocks reinforcing demand for the greenback at the expense of the euro and the yen.

The dollar index, which measures the dollar against a basket of currencies including the euro and the yen, eased 0.08 per cent to 101.06.

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The ECB is widely expected to keep rates on hold and keep the door open to another hike, with some market participants struggling to see how it could signal a more hawkish trajectory than markets have already priced in. Traders indicated two rate hikes by early 2027.

“We cannot fully discount the tail risk of an early 25 bps hike (today),” said Michiel Tukker, a senior strategist at ING.

“The question is whether markets would interpret this as a hawkish policy turn or whether the move would be perceived as front-loading September’s move.”

The euro was last up 0.09 per cent at $1.1423.

YEN SHOWS LITTLE SIGN OF RECOVERY

The yen reached its lowest point since December 1986 versus the greenback, with expectations of a measured approach to rate hikes at the Bank of Japan. The Japanese currency was last down 0.10 per cent at 163.30.

“The consensus view blames a timid BOJ (for the recent yen fall), but I think the problem is that higher oil prices have dashed hopes of 1.5 per cent GDP growth this year,” said Kit Juckes, a strategist at Societe Generale, after flagging that the yen has lately been the weakest G-10 currency.

Japan’s 2-year government bond yield hit a 31-year high on Thursday on growing bets that the BOJ would accelerate the pace of interest rate hikes. 

Japan’s finance minister has repeatedly issued verbal warnings about a possible intervention in the currency market, including on Thursday saying the government was ready to take decisive forex action as needed. 

Tokyo carried out yen-buying operations in April and May, when the yen weakened beyond the 160-per-dollar level. 

Mallika Sachdeva, the head of forex thematics at Deutsche Bank Research, said that the ultimate impact would depend on the levers the government chooses to use.

 “If the Government Pension Investment Fund (GPIF) is mandated to bring money back into domestic assets, this could be very bullish for the yen,” she said.

“However, if the BOJ is coopted to support bonds through renewed JGB purchases, this could be very negative,” she added.

Japan’s finance minister recently said the government aims to steer the country’s vast state pension funds to “substantially” increase investments in domestic assets. 

Analysts said the GPIF has the greatest capacity among Japanese investors to influence the forex market. GPIF conducts a strategy review every five years and completed its latest one in 2025.

Strategists also flagged that market participants would closely watch Japan’s fiscal trajectory, which is crucial for the yen.

Source: Reuters

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