Oil Shock and War Fears Push the Dollar Higher Against the Yen

Global currency markets are feeling the strain of a rapidly escalating Middle East conflict, with the US Dollar edging higher against the Japanese Yen as surging oil prices and geopolitical uncertainty reshape investor sentiment. The USD/JPY pair traded around 158.10 on Monday, up modestly on the day, as traders weighed the economic fallout of a widening regional war.


Oil prices were the dominant market story of the day after air strikes on Iranian facilities over the weekend sent crude prices sharply higher. West Texas Intermediate briefly spiked near $113 per barrel before pulling back to around $101 — still roughly 15% above recent levels — following reports that G7 nations and the International Energy Agency may consider releasing emergency reserves to cool the market.


For Japan, the timing could hardly be worse. As one of the world’s largest energy importers, the country is acutely vulnerable to sustained rises in oil costs. Higher energy prices threaten to widen Japan’s trade deficit and dampen the broader economic outlook. Japan’s Prime Minister acknowledged the public’s concern over rising gasoline prices and said the government is actively exploring ways to cushion the blow, though she noted it remains too early to fully gauge how the conflict could ripple through the Japanese economy.


Investors are keeping a close eye on Tuesday’s release of Japan’s revised fourth-quarter GDP figures. Economists expect the data to show growth of 0.3% — meaningfully stronger than the preliminary 0.1% estimate — which could provide some modest support for the yen if confirmed.


On the other side of the trade, the US Dollar remained firm, buoyed by risk-off flows and rising energy prices. The Dollar Index hovered around 99.35 after touching an intraday high near 99.70. The US-Israel-Iran conflict has now entered its second week, with escalating strikes and retaliatory attacks disrupting oil flows through the strategically critical Strait of Hormuz and rattling foreign exchange markets globally.


The Federal Reserve’s path forward is increasingly murky. Policymakers were already cautious about persistent inflation, and the oil price surge only reinforces the case for keeping interest rates elevated. Yet, last week’s labor market report complicated matters further, showing job losses and a rising unemployment rate — raising the specter of stagflation and putting the Fed in a difficult bind between fighting inflation and supporting a cooling economy.


All eyes now turn to Wednesday’s US Consumer Price Index report for February, which could be a pivotal data point for markets trying to gauge where the dollar — and US monetary policy — goes from here.