Yen nears 40-year low, dollar gains as peace talks in doubt

SINGAPORE: The dollar strengthened in Asian trade on Friday, pinning the yen near a four-decade low as a peace deal between the U.S. and Iran hung in the balance and traders speculated further intervention may be needed to arrest a slide in the Japanese currency. The Japanese currency reversed earlier strength to trade flat against the U.S. dollar at 161.455 yen, grinding closer to its weakest level in two years, though public holidays in China, Hong Kong and Taiwan and an impending one in the U.S. kept liquidity thin. The U.S. dollar index, which measures the greenback's strength against a basket of six currencies, rose 0.3% to a one-year high of 101.07 after U.S. Vice President JD Vance pulled out of a planned trip to meet Iranian negotiators in Switzerland on Friday. They had been set to begin complex talks on implementing the 14-point agreement struck between Tehran and Washington to end their war. "Markets will be watching closely to see how implementation and the tougher follow-up negotiations develop in the coming days," Danske Bank analysts wrote in a research report. The British pound was down 0.2% at $1.3174, moving in line with weakness in most other currencies and little changed after Greater Manchester Mayor Andy Burnham triumphed in a by-election in Makerfield. That set the stage for a likely challenge to Prime Minister Keir Starmer for the leadership of the ruling Labour Party. Yen finds little relief But the Japanese currency has found little relief even after the Ministry of Finance's dollar-selling intervention earlier this year and the Bank of Japan hiked interest rates to a 31-year high on Tuesday. Concerns around the spending plans of Japanese Prime Minister Sanae Takaichi have undermined investor confidence and prompted speculation that more intervention could follow. "Large speculative yen short positions have not eased despite the BOJ’s rate hike this week," DBS analysts wrote in a research report. "Japan’s tolerance for yen weakness appears close to its limit," the note added. "Policymakers may deploy both rhetoric and further market interventions to curb yen depreciation, with falling oil prices also offering some support to the currency." Japan's annual core inflation stayed below the central bank's 2% target for a fourth straight month in May, data showed on Friday, as fuel subsidies offset rising raw material costs from the Middle East conflict. "While the government’s fuel price caps have so far kept a lid on consumer prices, we expect the pass-through of higher energy costs to utilities charges and other goods and services to lift inflation to around 3.5% by early-2027," analysts from Capital Economics wrote in a research note. Minutes from the central bank's meeting in April released on Friday morning and comments soon after from BOJ Deputy Governor Ryozo Himino also cautioned there could be more rate hikes tied to the inflationary effects of the Iran war. "Our view is that Japan’s Ministry of Finance will likely defend the 161.95 level the first couple of times it’s tested, deploying similar firepower to what we saw in April and May - around ¥11.7 trillion," said Tony Sycamore, market analyst at IG in Sydney. "That would mean they would have used roughly 11-12% of their total reserves in a relatively short period, with little noticeable impact," he added. "At that stage, they would need to become far more selective with future interventions to preserve flexibility and credibility, keeping plenty of ammunition in reserve." The dollar has strengthened this week as traders reassess expectations that the Federal Reserve could act sooner than expected to tame inflation, perhaps as early as next month. Fed funds futures are pricing an implied 39.6% probability of a 25-basis-point hike at the U.S. central bank's next two-day meeting in July, up sharply from an 8% chance a week ago, according to the CME Group's FedWatch tool. The euro was down 0.3% at $1.1419. The Australian dollar was 0.3% lower at $0.6994, while its kiwi counterpart slipped 0.5% to $0.5726. Bitcoin was off 0.7% at $62,549.31, while ether slid 0.9% to $1,693.19.