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Published : 23 Jul 2026, 06:40 PM
The dollar hit a fresh 40-year high against the yen and edged up against the euro ahead of the European Central Bank's policy meeting on Thursday, as investors kept a close watch on the widening 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 US-Israeli war on Iran has nearly shut the Strait of Hormuz.
The greenback has found support as markets rein in expectations for US 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 USD, which measures the dollar against a basket of currencies including the euro and the yen, rose 0.05 percent to 101.2.
The ECB is widely expected to keep interest 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 are likely by early 2027.
“We cannot fully discount the tail risk of an early 25bps 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 EUR was down 0.08 percent at $1.1403.
The yen JPY reached its lowest point since December 1986 versus the greenback at 163.445, with expectations of a measured approach to rate hikes at the Bank of Japan.
The Japanese currency was last down 0.14 percent at 163.37.
"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 percent 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, after carrying out yen-buying operations in April and May, with the yen weakening beyond the 160 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 co-opted 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.
"It is only when the market becomes more confident in Japanese fundamentals that further forex intervention from the MoF is likely to have a lasting impact," said Jane Foley, senior forex strategist at Rabobank.
Japanese Prime Minister Sanae Takaichi's administration has struggled to shed market perceptions that it could ramp up spending and pressure the BOJ to delay interest rate hikes to curb the cost of funding Japan's already huge debt.
