Yen Hits 40-Year Low as USD/JPY and USD/CAD Dominate G10 Volatility

USD/JPY is trading above 163, pushing the yen to its weakest level since December 1986 — down roughly 51% since 2011 — while USD/CAD stands out as the only G10 pair currently gaining against the dollar. The divergence between Asia's weakest currency and North America's most resilient one has become one of the key themes in this week's FX market.

Why the Yen Keeps Falling

The move isn't just driven by dollar strength — it also reflects a widening policy gap. The Bank of Japan holds its policy rate at 1%, compared with the Federal Reserve's target range of 3.5%–3.75%. A Reuters poll of 87 economists found that 86% expect only a 25-basis-point BOJ rate increase by December, with political pressure from the Takaichi government cited as a factor that could delay further tightening.

Japan's Ministry of Finance spent an estimated ¥11.7 trillion (about $71.7 billion) supporting the yen between late April and May, yet USD/JPY has since moved above the 162 level that many market participants previously viewed as a potential intervention threshold, without any confirmed official action. As a result, some market participants have become more confident in further yen weakness, although the U.S. Treasury has warned against excessive currency volatility and continues to encourage Japan to maintain policy normalization.

CAD's Oil Linkage — With a Caveat

USD/CAD's recent decline has reflected stronger Canadian dollar performance, supported by higher oil prices amid Middle East supply concerns and solid Canadian retail sales data. Traders should note that these conditions developed before the weekend pause in U.S.-Iran hostilities, which has since contributed to a sharp decline in oil prices. If lower oil prices persist, they could reduce support for the Canadian dollar.

EUR/USD and GBP/USD Under Pressure

Both currency pairs remain under pressure, reflecting broad U.S. dollar strength and, in the UK's case, additional uncertainty surrounding domestic politics. Downside pressure may persist if current macroeconomic conditions remain broadly unchanged, although future policy signals from the ECB or BOE could influence market direction.

What to Watch

1. July 31: BOJ policy decision — markets will closely monitor Governor Ueda's remarks for clues about the timing of any future rate increase.
2. 162–165 range: USD/JPY remains an area closely watched by market participants, as further gains could increase expectations of official intervention.
3. Oil prices: Whether the Iran ceasefire holds may continue to influence oil prices and, in turn, the Canadian dollar.
4. ECB and BOE commentary: Policy guidance from either central bank could affect volatility in EUR/USD and GBP/USD.

Market Focus

USD/JPY continues to attract market attention due to its strong momentum, although market participants remain alert to the possibility of official intervention if exchange rate movements become excessively volatile. Meanwhile, the Canadian dollar's recent strength could become more sensitive to changes in oil prices following the decline in crude after the reported ceasefire.