The Iran-U.S. deadlock and soaring oil prices are converging, with the Federal Reserve's probability of raising interest rates in June increasing to 60%.

Reuters Finance APP News — On Monday (May 11), during European hours, the Japanese yen weakened across the board against a basket of major and minor currencies. Investors, concerned about a resurgence of conflict in Iran, shifted to buying US dollars as a safe haven asset, causing the yen to further diverge from its three-month high against the dollar set earlier. This trend occurred against the backdrop of the US officially rejecting Iran’s response to the US peace proposal.

As global oil prices rise, markets are once again worried that inflation pressures faced by the Bank of Japan may increase, potentially prompting short-term rate hikes, but specific actions remain dependent on more data from the world’s fourth-largest economy.

Today, the US dollar rose about 0.3% against the yen to 157.12 yen, opening at 156.55 yen. The dollar index increased approximately 0.11% on Monday, restarting the rally that paused last Friday, reflecting a strengthening of the dollar against a basket of global currencies.

US-Iran Negotiations Stall

US President Donald Trump announced on social media that he completely rejected Iran’s response mediated through Pakistan. According to Iranian media, Iran’s proposal includes: ending hostilities on all fronts (including Lebanon), lifting the US maritime blockade of Iranian ports, allowing Iran to manage the Strait of Hormuz, and receiving war reparations, in exchange for future nuclear negotiations. Iranian President Ebrahim Raisi strongly stated that Iran “will not bow to enemies,” emphasizing that negotiations do not mean yielding to “Trump’s greed.” Israeli Prime Minister Benjamin Netanyahu, in a televised interview, said the war is still ongoing because “there is more work to do to end it.”

Global Oil Prices Surge

On Monday’s open, global oil prices jumped over 5%, approaching multi-week highs, as markets worry about continued closure of the Strait of Hormuz and ongoing disruptions to oil supplies. The rise in oil prices has reignited concerns about accelerating inflation, which could prompt global central banks to raise interest rates in the short term—marking a sharp shift from market expectations before the conflict, which anticipated rate cuts or maintaining rates long-term.

Japan Interest Rate Outlook

With oil prices rising, the market has priced in a 60% chance of the Bank of Japan raising interest rates by 25 basis points at the June meeting, up from 55%. To recalibrate these probabilities, investors are awaiting more Japanese data on inflation, unemployment, and wages.

ING’s report on May 8 noted that despite ongoing uncertainties in the Middle East, Japan’s real wages in March have increased for three consecutive months. The results of the spring wage negotiations, with a rise of over 5%, have increased the likelihood of a rate hike in June.

Daiwa Securities strategists pointed out that the Bank of Japan may coordinate future rate hikes with the Ministry of Finance’s foreign exchange interventions, similar to operations in 2022 and 2024. It is also worth watching whether US Treasury Secretary Janet Yellen, during her visit this week, will mention the need for the BOJ to tighten monetary policy to help stabilize the foreign exchange market.

Goldman Sachs strategists have raised their expectations for Japan’s 10-year government bond yields, with the year-end target rising from 2.0% to 2.5%, and the target for the end of next year increased to 2.25%. Goldman Sachs believes that domestic inflation pressures, fiscal risks, and the global rising yield environment are jointly pushing the middle segment of the yield curve under pressure.

Overall, the core contradiction in the current yen trend lies in the tug-of-war between: safe-haven capital flows driven by geopolitical risks (which are bearish for the yen) and rising oil prices boosting expectations of rate hikes (which are bullish for the yen). In the short term, safe-haven sentiment dominates, pressuring the yen lower. However, if the probability of a June rate hike rises to 60% and subsequent Japanese inflation data continues to surprise on the upside, the yen may have a rebound opportunity. Markets will closely watch the Bank of Japan’s policy signals and further developments in US-Iran relations.

As of 16:11 Beijing time on May 11, USD/JPY was quoted at 157.09/10.

(End: Wang Zhiqiang HF013)

【Risk Warning】 According to foreign exchange management regulations, foreign exchange transactions should be conducted at banks or other designated trading venues. Unauthorized buying and selling, disguised foreign exchange transactions, arbitrage, or large-scale illegal foreign exchange dealings may be subject to administrative penalties by foreign exchange authorities; if criminal conduct is involved, criminal responsibility will be pursued according to law.