Yen Slides Near Two-Year Low as Fed Holds Rates Amid Middle East Tensions

The Japanese yen hovered near a two-year low in early Asian trading Thursday, weighed down by a stronger U.S. dollar as investors closely monitored central bank decisions across major economies against the backdrop of an escalating Middle East conflict and surging oil prices.

The yen steadied at 159.78, pulling slightly back from recent lows after Japanese Finance Minister Satsuki Katayama warned that authorities were on high alert for unusual currency market movements, partly attributed to speculative activity. The Bank of Japan, set to announce its policy decision later in the day, is widely expected to hold interest rates steady while awaiting further clarity on how the ongoing Iran conflict may impact Japan's import-dependent economy.

Meanwhile, the U.S. Federal Reserve held benchmark interest rates unchanged on Wednesday, projecting higher inflation, stable unemployment, and just one potential rate cut in 2026. Fed Chair Jerome Powell acknowledged an unusually uncertain outlook, offering little guidance on how policymakers would respond to rising energy costs and inflation pressures stemming from U.S.-Israeli military strikes on Iran. Markets have now pushed rate cut expectations to 2027, with futures data from CME Group's FedWatch tool indicating slim chances of easing even by December.

The U.S. dollar index held near four-month highs at 100.11, while the euro rose modestly to $1.1469 and the British pound edged up to $1.3273. Both the European Central Bank and Bank of England were also expected to keep rates unchanged at their Thursday meetings.

Oil markets continued rallying, with Brent crude jumping 4.2% to $111.87 per barrel following Iranian attacks on regional energy infrastructure. The Australian and New Zealand dollars posted small gains, while Bitcoin traded flat near $71,242.

Global currency and commodity markets remain on edge as geopolitical risks continue reshaping monetary policy outlooks worldwide.