Friends who have been watching the market recently should have felt it—the US dollar is really strong this week. Last week, the US dollar index rose for five consecutive days, with the euro, yen, and pound all declining across the board, especially the yen, which depreciated most noticeably, with USD/JPY approaching 159.

The core reason is that expectations for Federal Reserve rate hikes have heated up again. The US April CPI increased by 3.8% year-on-year, hitting a nearly three-year high. Coupled with tense Middle East tensions, the market now bets that the Fed has over a 50% chance of raising rates by the end of 2026. Once these expectations emerged, the dollar started soaring.

On the yen side, things are even more interesting. Japanese government bond yields have risen to 2.75%, a 30-year high. The market now believes there is an 80% chance that the Bank of Japan will raise interest rates next month. But the problem is, the Japanese government is still engaged in fiscal expansion, which puts pressure on the currency market. So, although the expectation of yen rate hikes is increasing, in the short term, the yen still faces significant depreciation pressure.

From a technical perspective, EUR/USD has broken below the 200-day moving average, and USD/JPY has broken above the 21-day moving average, signaling a clear buy signal. This week, focus on developments in US-Iran relations and Japan’s foreign exchange interventions. If Japanese authorities intervene again, USD/JPY could see a sharp pullback. While long-term prospects for yen rate hikes are positive, short-term movements still depend on the central bank’s actual actions.