The Japanese yen edged lower against a basket of major and minor currencies during Asian trading on Wednesday, extending its losses for a third consecutive session against the US dollar after trading beyond the 163-per-dollar level for the first time since 1986. The move has fueled speculation that Japanese authorities are nearing another intervention to support the currency and curb its excessive weakness.

The rally in global oil prices to six-week highs, driven by concerns over supply disruptions in the Middle East, has also renewed fears of rising inflationary pressures in Japan. That has strengthened expectations that the Bank of Japan will continue tightening monetary policy, with markets increasingly pricing in another interest rate hike at its October meeting.

The Price

• The US dollar rose less than 0.1% against the yen to ¥163.22, after opening at ¥163.15. It touched an intraday low of ¥163.03.

• The yen ended Tuesday down 0.4% against the dollar after falling to a fresh 40-year low of ¥163.24, pressured by the continued military escalation between the United States and Iran.

Japanese authorities

The latest decline in the yen has once again brought the currency into sharp focus after it traded beyond the 163-per-dollar level for the first time since 1986, reinforcing expectations that Japanese authorities may intervene in the foreign exchange market.

Japanese Finance Minister Satsuki Katayama said the government "stands ready to take decisive action in the foreign exchange market if necessary," adding that officials are closely monitoring currency movements, while declining to comment on any specific exchange rate level.

Japan carried out its largest-ever currency market intervention in April and May after the dollar climbed above ¥160 against the yen.

However, the impact of those interventions gradually faded, while Japanese officials have recently toned down their public warnings, preferring the element of surprise to keep markets guessing.

The positive impact of earlier official comments suggesting that Japan's Government Pension Investment Fund could shift part of its overseas investments into domestic assets has also faded, with market attention returning to the possibility of direct yen-buying intervention by Japanese authorities.

Views and analysis

• HSBC analysts, led by Global Head of FX Research Paul Mackel, said in a report released last week that they believe Japan could intervene in the foreign exchange market again in the near future.

• The analysts added that any intervention is unlikely to have a lasting impact unless the Bank of Japan delivers several hawkish interest rate hikes, the Federal Reserve resumes cutting interest rates, or market sentiment toward Japan's fiscal outlook changes.

• They also said their base-case scenario is for the dollar-yen exchange rate to remain within a new, higher trading range of roughly ¥160 to ¥165 per dollar, with the upper end capped by periodic intervention from Japanese authorities while negative real interest rates in Japan continue to provide underlying support for the pair.

Global oil prices

Oil prices rose more than 1% on Wednesday, extending gains for a second consecutive session to reach six-week highs as concerns over supply disruptions in the Middle East intensified amid continued military escalation between the United States and Iran, along with Houthi threats targeting Saudi-linked ships and oil tankers.

Iran conflict update

• The US military announced the completion of its eleventh consecutive night of airstrikes against Iranian military targets.

• The strikes targeted command centers, logistics facilities, drone storage sites, and naval equipment as part of efforts to protect international shipping through the Strait of Hormuz.

• Iran said it would continue its military response, including attacks on US military sites and bases across the region.

• US President Donald Trump warned that a suspected Iranian nuclear site in the Jabal Al-Fas area could soon face a major military strike.

• Tehran responded that any attack on its nuclear facilities would officially mark an expansion of the war across the entire region.

• Mediation efforts led by several regional parties, including Pakistan and Qatar, remain underway in search of a ceasefire, although no formal agreement or new truce has yet been announced.

Japanese interest rates

• With global oil prices continuing to rise, markets have increased the probability of a 25-basis-point Bank of Japan rate hike at this month's meeting to above 35%.

• Markets are now pricing the probability of a quarter-point rate increase at the Bank of Japan's October meeting at more than 95%.

• Investors are awaiting additional Japanese inflation, employment, and wage data that could reshape expectations for the Bank of Japan's policy outlook.

Oil prices rose around 2% on Tuesday, reaching their highest levels in five weeks, as mounting concerns over energy supply disruptions in the Middle East intensified following escalating attacks between the United States and Iran, alongside threats by Yemen's Houthi movement to impose a naval blockade on Saudi Arabia.

Brent crude futures gained 1.8% to settle at $90.85 a barrel, while US West Texas Intermediate (WTI) crude futures climbed 2% to close at $84.91 a barrel.

Brent recorded its highest settlement since June 10, while WTI posted its strongest close since June 11. Brent also remained in technically overbought territory for a seventh consecutive session, its longest such streak since June 2025.

Supply disruption fears lift oil as Middle East tensions escalate

Fresh military developments added to market concerns, with two tankers carrying Saudi crude bound for Asia changing course in the Red Sea on Tuesday following threats from the Iran-backed Houthis.

At the same time, US forces carried out overnight strikes on targets in southern and western Iran, while Tehran targeted US positions in Bahrain, Kuwait, and Jordan. At least one oil tanker also came under attack in the Strait of Hormuz.

A note from SEB Research said: "Optimists may view the latest US strikes as a final attempt to strengthen the negotiating position before reaching a settlement and reopening the Strait of Hormuz."

It added: "The risk is that the deadlock persists for longer, prolonging uncertainty over energy flows, keeping oil prices elevated, and leading to further attacks."

Red Sea threats and Russian supply disruptions add pressure

On Monday, the Houthis announced a naval blockade on Saudi Arabia, broadening the scope of the conflict and increasing risks to global energy supplies and trade beyond the Gulf region.

Shipping data from LSEG showed that the two tankers carrying Saudi crude to China and India reversed course and headed toward the Suez Canal, while sources confirmed that Saudi Arabia's Yanbu port on the Red Sea continues to operate normally.

Tim Waterer, chief market analyst at KCM Trade, said: "The Houthi threat to impose a naval blockade on Saudi Arabia is a significant development because it raises the risk of supply disruptions from one of the world's largest oil exporters."

In a separate development, data from the Joint Organizations Data Initiative (JODI) showed on Tuesday that Saudi crude oil exports fell for a third consecutive month in May, reaching a record low.

Meanwhile, as the war between Russia and Ukraine expanded beyond Ukrainian territory, the Caspian Pipeline Consortium (CPC) suspended crude oil intake from Kazakhstan after loading operations were halted on Monday following attacks on oil tankers at its Black Sea terminal, according to three industry sources.

Russia accused Ukraine of being behind the attacks on CPC tankers, while Kyiv has not commented on the allegations.

Investors are now awaiting weekly US oil inventory data from the American Petroleum Institute (API) later on Tuesday, followed by the Energy Information Administration (EIA) report on Wednesday.

Analysts expect energy companies to have drawn about 500,000 barrels from US crude inventories during the week ended July 17.

If confirmed, it would mark a second consecutive weekly inventory decline, compared with a draw of 3.2 million barrels during the same week last year and an average five-year decline of 1.2 million barrels over the 2021-2025 period.

The Canadian dollar weakened to its lowest level in a week against its US counterpart on Tuesday after renewed US tariff threats against Canadian goods prompted investors to scale back expectations for further interest rate hikes by the Bank of Canada this year.

The Canadian dollar, commonly known as the loonie, fell 0.2% to C$1.4104 per US dollar, or 70.90 US cents, marking its weakest level since last Tuesday.

US tariff concerns weigh on Canadian rate expectations

On Monday, US President Donald Trump announced a 50% tariff on a broad range of Canadian imports, citing what the US administration described as discriminatory treatment of American automobiles, alcoholic beverages, and dairy products in the Canadian market. The new tariffs are scheduled to take effect on August 19.

Kevin Ford, FX and macro strategist at Convera, said the Canadian dollar's weakness appears to be driven more by shifting interest rate expectations than by direct concerns over tariffs.

"The 30-day window before the latest US tariff threat takes effect gives markets reason to view it as another negotiating tool rather than an imminent breakdown in trade relations," he said.

Yield gap with the US widens despite higher oil prices

Swap markets now indicate investors expect just 13 basis points of additional rate hikes from the Bank of Canada by December, down from 16.5 basis points before the tariff announcement and 18 basis points before weaker-than-expected Canadian inflation data released on Monday.

Ford said the Canadian dollar continues to trade primarily as a reflection of broader macroeconomic forces, including interest rate expectations, growth differentials, and policy uncertainty, rather than as a currency-specific story.

Meanwhile, the US dollar strengthened against a basket of major currencies after the latest attacks in the Middle East pushed oil prices higher, reinforcing concerns that inflationary pressures could persist. US crude oil futures rose 2.5% to $85.31 a barrel.

In the bond market, Canadian government bond yields declined across the curve, with the two-year yield falling 2.7 basis points to 2.812%. The spread between Canadian and equivalent US two-year yields widened by 6.9 basis points to 144.5 basis points, the largest gap since May 2025.

Even before the first 30 days of the 60-day negotiation period had elapsed, during which the 14-point memorandum of understanding between Washington and Tehran was expected to evolve into a final peace agreement, the foundations of the talks collapsed as both sides accused each other of violating the deal.

The US Central Command (CENTCOM) and President Donald Trump said Iran had breached the memorandum by targeting commercial vessels in the Strait of Hormuz, imposing pre-approved shipping routes, and threatening to levy transit fees on vessels. In response, the US military resumed and expanded its nightly airstrikes across Iran, which Tehran also described as a violation of the agreement.

Iran subsequently declared the memorandum of understanding void, while chief negotiator Mohammad Bagher Ghalibaf said the country was engaged in a "fundamental and existential war with the United States."

With fewer than 30 days remaining before the negotiation deadline expires, attention is turning to the outlook for global oil markets.

US midterm elections matter more than the 60-day deadline

A senior Washington source working closely with the US Treasury Department told OilPrice.com that "the 60-day negotiation period is not the most important date. November 3, when the US midterm elections take place, is what really matters."

The source said Trump does not want to spend the remainder of his final term as a weakened president and is therefore seeking a decisive outcome on Iran while keeping gasoline prices at levels that do not undermine Republican prospects in the elections.

According to the source, historical data shows that every $10 increase in crude oil prices raises the average price of gasoline in the United States by around 25 to 30 cents per gallon.

Every one-cent increase in the national average gasoline price also reduces US consumer spending by more than $1 billion annually, placing additional pressure on the economy.

The report noted that this relationship carries significant political weight. Historically, US presidents and their parties have won all 11 presidential elections held when the economy avoided recession during the previous two years, while incumbents facing an economy in recession have won only once in seven elections.

The same pattern has also applied to midterm elections. Although Trump cannot seek another term, he is keen to avoid becoming a lame-duck president during the remainder of his presidency while also cementing a political legacy that could help preserve his family's influence within the Republican Party.

The report quoted Bob McNally, former energy adviser to President George W. Bush, as saying: "Nothing scares an American president more than high fuel prices."

He added that gasoline prices above $4 per gallon represent a particularly sensitive threshold for US administrations because of their negative impact on consumer spending and economic growth.

According to the report, the average US gasoline price stood at approximately $3.85 per gallon at the time of writing.

Iran understands the political pressure facing Trump

According to the US source, Iran fully understands the political constraints facing Trump, making it in Tehran's interest to intensify military operations while stopping short of provoking a large-scale US attack on the country's critical civilian infrastructure.

"As oil prices rise again and gasoline prices move higher with them, Iran is reminding us what could happen if the conflict escalates further, while we currently lack the tools needed to contain those risks," the source said.

The report noted that the United States is already producing oil at record levels, limiting its ability to increase supply quickly. It also said that drawing further from the strategic petroleum reserves of International Energy Agency member countries has become more difficult following the substantial releases made in recent weeks, while the impact of such measures could take months to materialize.

Other alternatives, including increasing supplies from Venezuela, Brazil, or Argentina, or constructing new pipelines that bypass the Strait of Hormuz, would require at least two years before affecting global oil supplies.

Bab el-Mandeb could become the next flashpoint

The report said last week's large-scale missile and drone attack by the Iran-backed Houthis on Abha International Airport in southern Saudi Arabia, together with renewed threats against Saudi oil facilities, was intended to remind Washington that Tehran could also carry out its previous threat to close the Bab el-Mandeb Strait.

The strategic waterway, located between Yemen and the coasts of Djibouti and Eritrea, handles roughly 10% of global oil trade.

According to the report, Iran has considered closing Bab el-Mandeb alongside the Strait of Hormuz since the outbreak of the war between Israel and Hamas but has so far refrained from taking that step.

"We believe this is the next likely step on the escalation ladder, and if it happens, it would significantly disrupt global oil markets while giving Iran additional leverage in negotiations over a final agreement," the US source said.

What does Iran want from a final agreement?

According to a senior energy sector source working closely with Iran's Ministry of Oil, Tehran aims to secure as many of the demands contained in its original 14-point proposal as possible before the negotiations conclude.

Those demands include:

* Israel's withdrawal from Lebanon.

* The withdrawal of all US forces from the Strait of Hormuz and surrounding areas.

* The removal of all international sanctions imposed on Iran.

* A $300 billion reconstruction package.

* Allowing Iran to manage the reduction of its enriched uranium stockpile within its own territory under the supervision of the International Atomic Energy Agency.

* Retaining its civilian nuclear program for peaceful purposes and electricity generation.

The report argued that meeting these demands would eliminate what Iran views as the existential threat facing the Islamic Revolutionary Guard Corps, which Washington considers the central pillar of the Iranian political system.

It added that the United States' long-term objective, from the Obama-era nuclear agreement through subsequent versions, has been to gradually weaken the Revolutionary Guard by restricting its financial and political influence before eventually integrating it into Iran's regular armed forces, a process Washington believed could ultimately reshape the country's political system.

Trump's options between politics and war

The report argued that any agreement signed by Trump that accepts all of Iran's demands would deal a significant blow to the political legacy he hopes to leave behind.

At the same time, the US president cannot escalate the conflict to a level that would trigger a sharp increase in fuel prices and hurt Republican performance in the midterm elections, as that would weaken his influence during the remainder of his presidency and reduce the prospects of preserving the political movement he leads within the Republican Party.

The report also noted that a Republican defeat could expose Trump to renewed legal and political challenges after leaving office.

As a result, both the US and Iranian sources believe the most likely scenario is a continuation of the current approach, with military operations remaining below the threshold of full-scale escalation while negotiations continue toward a final agreement.

The US source concluded: "After the midterm elections, regardless of the outcome, all political constraints on Trump will disappear. At that point, I don't believe he will stop until he secures the agreement he wanted from the beginning, including regime change in Iran."