The Japanese yen fell to its lowest level since 1986 during trading on Tuesday, bringing back to the forefront market fears of imminent direct intervention by Japanese authorities to support the currency, at a time when the dollar retreated slightly from its highest level in 13 months ahead of the release of US jobs data, which could play a crucial role in determining the path of US interest rates.
The yen fell to 162.41 against the dollar for the first time in 40 years before recovering to trade at 162.23. Meanwhile, Japanese Finance Minister Satsuki Katayama reiterated that authorities are prepared to act at any time if necessary, but she avoided using a more hawkish tone regarding intervention in the foreign exchange market.
The yen is on track to record a decline of about 2% during the second quarter of the year, in its fourth consecutive quarterly loss, and its longest losing streak in four years, amid the continued large gap between interest rates in Japan and the United States, which continues to put pressure on the Japanese currency.
Intervention is imminent... but the trend remains against the yen.
Carol Kong, a currency market analyst at Commonwealth Bank of Australia, believes the question is no longer whether the Japanese Ministry of Finance will intervene again to support the yen, but when.
She added that any potential intervention by the Japanese authorities would not be enough to reverse the upward trend of the dollar against the yen, predicting that the exchange rate would reach 164 yen to the dollar by the beginning of 2027.
Despite Japan implementing massive interventions over the past months amounting to about 11.7 trillion yen ($72.25 billion), along with the Bank of Japan raising interest rates, these measures have not succeeded in changing the overall direction of the currency.
This is due to the continued global inflationary pressures exacerbated by the Iran war and the subsequent changes in global monetary policy expectations, which strengthened the dollar and weakened the effectiveness of Japanese measures.
Speculators' bets are increasing... and all eyes are on the US jobs data.
Meanwhile, speculators continued to increase their bets on a yen decline, with the latest US regulatory data showing net short positions on the Japanese currency at $11.3 billion, a level approaching its highest point in two years.
Although intervention by Japanese authorities in late April and early May gave the yen a temporary boost, pressure quickly returned as markets repriced the likelihood of the US Federal Reserve raising interest rates during the second half of the year.
All eyes are now on the US jobs report for June, due to be released on Thursday, after jobs data over the past three months came in stronger than market expectations, reinforcing the hardline shift within the Federal Reserve.
Market pricing currently shows a 61% probability that the Fed will raise interest rates at its next September meeting.
Why is it difficult for Japan to defend its currency?
Matt Simpson, chief market analyst at StoneX, said that Japan's finance ministry may indeed intervene to support the yen, but it recognizes that it is trying to swim against the tide as the Federal Reserve adopts a tight monetary policy.
He added that any negative surprise in US economic data this week could give policymakers in Japan a better opportunity to intervene, if it weakens the dollar and reduces expectations of a US interest rate hike.
He explained that the absence of such a surprise means that official Japanese statements will remain mere verbal messages without a lasting impact on the direction of the market.
The dollar maintains its strength amid growing bets on continued gains.
Despite its slight decline, the dollar index, which measures the performance of the US currency against a basket of six major currencies, held steady at 101.32 points, heading for quarterly gains of 1.4%, after rising by 1.6% during the first quarter of 2026.
The data showed that investors increased their bets on the continued strength of the dollar at the fastest pace recorded during the first half of the year, which increased pressure on most major currencies.
The euro fell 0.24% to $1.1396, remaining close to its one-year low hit last week, while the Australian dollar dropped to a three-month low of US$0.6867, and the New Zealand dollar held steady at US$0.5646.
The pound also fell 0.19% to $1.3234, after investors followed comments from Andy Burnham, the frontrunner to become Britain's next prime minister, in which he pledged to adhere to a set of financial rules closely watched by the markets.
Will the dollar's upward trend continue?
Analysts at the BlackRock Investment Institute pointed out that the question is no longer about the dollar's ability to maintain its gains, but rather about the impact of its continued strength on high-risk assets.
However, they explained that the current dollar levels are largely in line with underlying economic factors, making the entry into a strong and prolonged upward cycle less likely.
They added that markets may have overpriced expectations of a tightening of US monetary policy, which could limit further gains for the dollar in the coming period.
Meanwhile, investors absorbed a U.S. Supreme Court ruling preventing President Donald Trump from firing Federal Reserve Governor Lisa Cook, which helped to calm concerns about the independence of the U.S. central bank.
On the geopolitical front, the atmosphere remained cautious after US and Iranian delegations were scheduled to meet in Doha this week, but Iran confirmed that no official date had yet been set for the meetings, while the exchange of missile attacks over the weekend tested the fragility of the temporary ceasefire agreement, keeping uncertainty dominating market sentiment.
