Forex

• USD/JPY rises as split BoJ board views on future rate hikes keep the Yen on the defensive.
• Japan logged an unexpected June current account deficit of JPY 92.3 billion, its first in 17 months, on large foreign dividend payouts.
• Escalating US-Iran tensions boost the Dollar, driving the USD/JPY pair higher.

USD/JPY gains ground after registering modest losses in the previous day, trading around 158.20 during the Asian hours on Monday. The pair remains stronger as the Japanese Yen (JPY) holds losses following the release of the Bank of Japan’s (BoJ) Summary of Opinions from its July 30–31 monetary policy meeting.

The summary suggested a clear division among board members; while some advocated for holding interest rates steady to evaluate the lagged impact of previous rate hikes, others pushed to maintain or even accelerate the tightening cycle, citing rising upside risks to prices. Despite members noting that Middle East tensions are weighing on economic activity, they highlighted that robust AI-related demand and a moderately recovering domestic economy continue to provide an offset.

Japan recorded its first current account deficit in 17 months in June, driven by high dividend payouts to overseas investors who have been pouring capital into domestic markets. According to Finance Ministry data released Monday, the deficit hit JPY 92.3 billion ($584.51 million), wildly missing economists’ median forecast of a JPY 1.51 trillion surplus in a Reuters poll, and down sharply from a JPY 1.28 trillion surplus a year earlier.

The USD/JPY pair rises as the US Dollar (USD) continues to draw support from broad risk aversion. Geopolitical tensions remain high as the ongoing US-Iran conflict enters a critical diplomatic phase, with intense military engagements and strategic pressure surrounding the Strait of Hormuz driving market caution. Although Iranian officials noted on Sunday that Oman-mediated negotiations regarding the management of the strait are making progress, safe-haven demand for the Greenback remains firmly intact.

Fed expectations seen driving scope for lower yields

According to TD Securities, the risk of another Fed hike “lingers,” but the bank argues that upcoming inflation data could be pivotal for rate expectations. The team notes that their projections for this week’s CPI — “core and headline CPI this week (0.20% m/m and 0.15% m/m, respectively)” — would “likely lead to further pricing out of hikes.” With “the majority of the recent move higher in rates driven by Fed expectations,” TD Securities adds that “rates could move lower as hikes are priced out.”

Musalem flags persistent inflation risks as Fed bias stays hawkish

Fed’s Musalem delivered a modestly more hawkish tone, with the FXS Speechtracker score at 7.4 versus a 7.0 historical baseline, underscoring concern that inflation expectations could risk losing their anchor even as they are currently described as stable and aligned with the 2% target. Emphasis on core inflation amid energy volatility, a preference for incremental rate hikes, and an assessment that core inflation likely sits between 2.5% and 3%—alongside a stated willingness to surprise markets when needed—reinforce a bias toward tighter policy and a higher-for-longer stance. The assertion that the Dollar’s reserve status is not under threat and that the United States remains the fastest-growing, most innovative economy with strong rule of law further supports a constructive backdrop for the Dollar, especially as financial conditions are still seen as highly accommodative and many asset prices remain elevated.

The FXS Fed Sentiment Index was unchanged, moving 0.00 points to hold at a hawkish 138.69, signaling that despite the slightly above-baseline speech score, the broader policy tone remains consistently restrictive rather than newly escalated. With the index firmly above the neutral 100 mark and aligned with the elevated FXS Speechtracker reading, markets are likely to interpret Musalem’s remarks as reinforcing existing expectations for a cautious, data-dependent path that leans toward additional tightening if inflation fails to move sustainably closer to the 2% target.