US Dollar Weakens as Yen Rally Accelerates and Brent Crude Tops $100

Key Takeaways

• The U.S. dollar traded near a seven-month low against the Japanese yen as expectations of further Bank of Japan tightening supported the Japanese currency.
• Brent crude settled above $100 per barrel after renewed attacks in the Middle East intensified concerns about energy supplies.
• Traders are assessing whether higher oil prices will keep inflation elevated and influence upcoming Federal Reserve and Bank of Japan decisions.

US Dollar Struggles Despite Rising Geopolitical Risks

source: tradingeconomics

The U.S. dollar weakened against the Japanese yen on Wednesday as currency traders focused on shifting interest-rate expectations and the risk of further energy-market disruption.

USD/JPY fell 0.23% to around 153.65, remaining close to Tuesday’s seven-month low of 152.89. The yen has gained approximately 4% since the beginning of September, placing pressure on a currency pair that had previously benefited from the wide interest-rate gap between the United States and Japan.

The U.S. Dollar Index, which measures the greenback against six major currencies, traded near 98.83 and approached its lowest level in almost two weeks. The move was notable because escalating geopolitical tensions often support the dollar through increased demand for liquid, defensive assets.

This time, however, expectations surrounding Japanese monetary policy and growing sensitivity to U.S. policy risks appeared to have a stronger influence on foreign-exchange markets.

The dollar recovered slightly from its intraday lows after the U.S. Treasury announced that it would increase the size of a long-dated bond buyback operation to as much as $6 billion. The programme may provide limited support to Treasury-market liquidity, although it did not reverse the broader decline against the yen.

Japanese Yen Strengthens as BOJ Rate Expectations Rise

The yen’s advance has extended beyond its exchange rate against the dollar. Japan’s currency has also strengthened against the euro, British pound, Mexican peso and Turkish lira, indicating that the move is affecting a broader range of carry trades.

Carry trades typically involve borrowing in a currency with relatively low interest rates, such as the yen, and investing in assets denominated in higher-yielding currencies. These positions can come under pressure when the funding currency rises rapidly, forcing traders to reduce or close leveraged exposure.

Expectations that the Bank of Japan could raise interest rates by 25 basis points at its September 17–18 meeting have strengthened the yen’s outlook. The meeting dates are confirmed in the central bank’s 2026 monetary-policy schedule.

Possible repatriation flows from Japanese investors and signs of U.S. support for a stronger yen have also contributed to the move. However, further appreciation may depend on whether BOJ officials signal that monetary tightening will continue beyond September.

A less hawkish message could encourage some traders to rebuild carry positions. Conversely, confirmation that additional rate increases remain possible could place renewed downward pressure on USD/JPY.

Higher Oil Prices Complicate the Federal Reserve Outlook

The return of $100 oil creates a difficult backdrop for the Federal Reserve. Rising energy costs can increase transportation, manufacturing and consumer prices, potentially slowing progress toward the central bank’s inflation target.

Higher oil prices do not automatically strengthen the dollar. Although inflation concerns may encourage the Fed to maintain higher interest rates, an extended energy shock could also weaken economic growth and reduce demand for U.S. assets.

This tension may help explain why the dollar failed to benefit substantially from the latest geopolitical escalation. Currency traders appear to be balancing the possibility of tighter U.S. monetary policy against concerns about inflation, fiscal conditions and slower global growth.

The Federal Reserve is scheduled to hold its next policy meeting on September 15–16. The decision will be followed closely for guidance on whether policymakers see the oil-price surge as a temporary supply shock or a more persistent threat to inflation.

Euro Holds Near Two-Week High Ahead of ECB Decision

The euro edged 0.05% higher to approximately $1.1628, leaving EUR/USD near a two-week high ahead of the European Central Bank’s September 10 monetary-policy decision.

Expectations of an ECB rate increase have provided some support for the single currency. However, Europe’s dependence on imported energy means that sustained oil and natural-gas price increases could present both inflation and growth risks.

Elsewhere, the dollar edged higher against the Swiss franc to 0.8105. The Canadian dollar weakened to around C$1.3808 per U.S. dollar, while the Australian dollar traded near $0.7216.

The mixed performance indicates that the dollar’s weakness was concentrated most heavily against the yen rather than representing a uniform decline against every major currency.

What Could Drive the Dollar and Yen Next?

Upcoming inflation releases and central-bank meetings could determine whether the yen rally continues.

The U.S. Producer Price Index for August is scheduled for September 10, followed by the Consumer Price Index on September 11. The official U.S. economic-release calendar confirms both dates.

Stronger-than-expected inflation could increase expectations of tighter Federal Reserve policy and provide some support for the dollar. However, the effect may depend on whether rising prices are accompanied by resilient economic activity or signs that higher energy costs are weakening demand.

For USD/JPY, the next important technical area is around 152.90, the recent seven-month low. A sustained break below that level could reinforce the yen’s momentum and encourage further unwinding of carry trades. A recovery above 155 would suggest that the latest appreciation is beginning to lose strength.

Oil prices will remain another important variable. Further attacks on tankers, production facilities or regional shipping routes could keep Brent above $100 and increase volatility across currencies, bonds and equities.