USD/JPY approaches 165 as Fed, BOJ decisions and Hormuz risks collide

USD/JPY surged to fresh multi-decade highs near 165 this week, with the rally's next leg hinging on concurrent Federal Reserve and Bank of Japan policy decisions and escalating risks to oil shipments through the Strait of Hormuz.

The dollar-yen pair pushed to levels not seen in decades, approaching the 165 threshold, as the prospect of a hawkish Fed hold and a BOJ that may accelerate rate hikes set up a binary week for the world's most-traded currency pair. The dollar index climbed above 101.40 — its highest in three weeks — while Brent crude briefly reclaimed $100 a barrel before settling back below that level after a report of possible renewed US-Iran talks.

"The breakout we flagged last week played out exactly as anticipated, but whether the rally extends further depends on how the Fed and BOJ navigate a complex macro backdrop," said James Okafor, central bank analyst at Edgen. "The added layer of Hormuz risk creates cross-currents that benefit both the dollar and the yen as safe havens."

USD/JPY traded near 163.80 on Friday after touching levels not seen since the 1980s. The 10-year US Treasury yield pushed to a 17-month high as money markets priced a 78% probability of a Fed rate hike at the September meeting, according to Trading Economics data. WTI crude rose 5% to $91 a barrel before paring gains, while gold in India crashed by as much as Rs 3,300 per 100 grams — the first decline in five days — as higher yields and a stronger dollar weighed on non-yielding assets.

The Federal Reserve's July 29 decision sets the immediate tone. While the Fed is expected to hold rates at 5.25% to 5.50% — unchanged since July 2023 — the statement and press conference will signal whether the recent oil-driven inflation spike shifts the dot plot. The last time the Fed faced a comparable oil shock was in 2022 after Russia's invasion of Ukraine, when it delivered four consecutive 75-basis-point hikes. For the BOJ, a Bloomberg report that officials are open to faster rate hikes than economists expect has strengthened bets on an October move. Japan's consumer inflation picked up in June, data showed Friday, keeping the BOJ on track to normalize policy.

Rate Differentials Widen to Multi-Decade Extremes

The fundamental driver of USD/JPY remains the interest rate gap. The US fed funds rate at 5.25% to 5.50% compares with Japan's benchmark at 0.25% after the BOJ's March 2026 hike — its first since 2007. That 500-basis-point differential has made the yen the preferred funding currency for carry trades, with investors borrowing yen at near-zero rates to buy higher-yielding dollar assets. The BOJ's next policy decision falls on Oct. 30, and swaps markets now price a 60% probability of a 25-basis-point hike, up from 35% a month ago.

Hormuz Risk Adds a Geopolitical Premium

The escalation in the Middle East has added a new dimension to the yen trade. Houthi militants targeted two Saudi oil tankers in the Red Sea, while the US carried out a 13th consecutive night of strikes on Iran. The Strait of Hormuz — through which about 20% of global oil passes — is now a flashpoint. Higher oil prices reinforce inflation expectations, which in turn support the dollar via the rate-hike channel. But the same geopolitical uncertainty also drives safe-haven demand for the yen, creating a tension that has kept USD/JPY volatile even as it trends higher.

If the Fed signals a September hike and the BOJ holds steady, USD/JPY could test 165 and beyond, raising the probability of Japanese intervention. If the BOJ surprises with hawkish language, a sharp yen reversal could unwind billions in carry trades. The next 10 days will determine which path the pair takes.

This article is for informational purposes only and does not constitute investment advice.