The yen traded on the weaker side of 163 per U.S. dollar during the Asian session after touching 163.24 in New York trading overnight, its lowest level since late 1986. The sharp depreciation reflects widening interest rate differentials between Japan and the United States, alongside mounting concerns over Japan's economic outlook.
The dollar also gained against several major currencies as investors sought safety amid escalating geopolitical tensions in the Middle East. The greenback briefly pushed the euro below the $1.14 mark as U.S. military strikes on Iran entered an 11th consecutive night, adding to uncertainty across global financial markets.
Commenting on the market outlook, Commonwealth Bank of Australia currency strategist Samara Hammoud said, "A continuation of the Middle East conflict should support the dollar because of its safe-haven status and typically positive correlation with oil prices."
The euro was last trading at $1.1408, while the Australian dollar slipped below the $0.70 level. The New Zealand dollar held just above its 200-day moving average at $0.5825, and the British pound also weakened to $1.3385 after falling through its own 200-day moving average. Investors are also assessing how Britain's new finance minister, John Healey, intends to fund government spending plans.
Adding further support to the U.S. dollar, Brent crude futures climbed to a six-week high of $92.67 per barrel, while U.S. Treasury yields remained elevated. The 30-year Treasury yield reached 5.15% on Tuesday, its highest level in two months, after broad-based selling in the bond market. Meanwhile, the benchmark 10-year Treasury yield hovered around 4.64%, its highest level since May.
Higher U.S. bond yields continue to increase the appeal of dollar-denominated assets while putting additional pressure on lower-yielding currencies such as the yen. Investors are also awaiting the outcome of a closely watched U.S. 20-year Treasury auction later in the day for further signals on interest rate expectations.
Markets Watch for Possible Japanese Intervention
The yen's weakness has once again placed market attention on the possibility of intervention by Japanese authorities. Persistently low interest rates in Japan, combined with concerns about the country's fiscal position, have contributed to the currency's steady decline over recent months.
Japan previously carried out record currency interventions in April and May after the dollar rose above the 160-yen level. While those operations temporarily strengthened the yen, their effects gradually faded, and authorities have since become less vocal about intervention, instead relying on market uncertainty to discourage speculative selling.
Recent optimism sparked by Japan's finance minister suggesting that the country's government pension fund could redirect some overseas investments into domestic assets has also diminished, returning the focus to the likelihood of official intervention in the foreign exchange market.
HSBC analysts believe another intervention may be approaching.
"We think (Japan) may soon intervene again," HSBC analysts, led by Global Head of Foreign Exchange Research Paul Mackel, said in a report last week.
However, the analysts cautioned that intervention alone is unlikely to produce a lasting recovery for the yen unless broader economic conditions change.
"Our base case is for dollar/yen to be trapped in a new and higher range, mainly 160-165, capped by periodic intervention but supported by negative real rates in Japan."
They added that sustained gains for the yen would likely require several more hawkish interest rate increases from the Bank of Japan, a return to interest rate cuts by the U.S. Federal Reserve, or a significant improvement in investor confidence regarding Japan's fiscal outlook.
For now, currency traders remain on high alert, with every move in the dollar-yen exchange rate closely watched for signs that Japanese authorities may once again step into the market.