Most Asian currencies were confined to tight trading ranges on Monday as investors monitored the possibility of a wider escalation in the U.S.-Israel war on Iran, leaving many regional currencies to absorb recent declines.
The Japanese yen performed relatively strongly compared with other currencies in the region after Bank of Japan Governor Kazuo Ueda adopted a somewhat hawkish tone in remarks to parliament and senior officials signalled that authorities may act to curb speculative moves in the currency market.
In Asian trading, the dollar index and dollar index futures were broadly unchanged after having rebounded back above the 100 point mark last week. Rising oil prices linked to the Iran conflict contributed to markets trimming expectations for Federal Reserve interest rate reductions.
The dollar showed limited reaction to U.S. President Donald Trump saying that negotiations with Iran were progressing and that a ceasefire could be near.
Japanese yen recovers from 2024 lows on BOJ signals and intervention rhetoric
The USD/JPY pair dropped 0.4%, slipping back below the 160 yen level as the yen recovered from its weakest levels since July 2024. The move was supported by explicit intervention threats from Japanese officials.
Top currency diplomat Atsushi Mimura warned on Monday that authorities might need to take "decisive steps" should speculation against the yen continue, marking the strongest verbal intervention warning to date. Historically, testing the 160 yen area has prompted intervention in the past two years.
Separately, BOJ Governor Kazuo Ueda told parliament that the central bank would monitor yen movements closely and assess their effects on import-driven inflation. His remarks were read as indicating that the BOJ could consider raising interest rates in the coming months to bolster the yen and offset higher import inflation, particularly as energy prices climb.
Regionwide FX reaction muted as Iran tensions pressure risk appetite
Across Asia, currency moves were modest on Monday. The USD/CNY pair was unchanged, while the USD/KRW pair rose 0.5%. The region's risk appetite remained fragile amid concerns that a prolonged conflict in Iran would disrupt oil flows through the Strait of Hormuz.
Iran permitted 20 Pakistan-flagged tankers to transit the Strait over the weekend but has otherwise kept the passage effectively closed in response to U.S. and Israeli actions. The war also risked drawing in new fronts after Houthi forces from Yemen, backed by Iran, struck Israel over the weekend; the Houthis possess the capability to conduct attacks in the Red Sea.
Several Asian economies rely heavily on energy shipments from the Middle East and therefore face heightened vulnerability to extended supply interruptions.
India, which is particularly dependent on Middle Eastern energy, saw notable currency volatility. The Indian rupee had slid to a record low of 95 rupees to the dollar last week. On Monday the USD/INR pair fell sharply after the Reserve Bank of India tightened limits on foreign exchange speculation in local markets, a move that triggered dollar selling by domestic traders.
Other Asian currencies showed muted action. The USD/SGD pair was flat, and the AUD/USD pair declined slightly.
For now, regional foreign exchange markets are balancing between geopolitical-led commodity price drivers, central bank commentary and targeted policy moves that aim to stabilise local markets. The interplay of those factors is likely to keep volatility contained in the near term unless developments in the Iran conflict or additional policy steps materially alter risk or liquidity conditions.