Japanese Yen weakens to five-week low as US strikes on Iran lift US Dollar safe-haven appeal

• The Japanese Yen drops to its lowest level in over five weeks amid heightened tensions in the Middle East.
• Japan's Composite PMI hits 51.4 in June, the fastest pace since February, but fails to support the Yen.
• Surging Crude Oil prices threaten Japan's trade balance, further weakening the currency.

The Japanese Yen (JPY) kicks off the week under pressure, stretching its losing streak to a third consecutive day against the US Dollar (USD) on Monday. The Yen tumbled to its weakest level in over five weeks, dragged lower as the Greenback regained safe-haven appeal following a dramatic escalation in the Iran-Israel war.

Although the Yen is traditionally seen as a safe-haven currency, it struggled to benefit from it this time, overshadowed by the US Dollar's stronger appeal after the United States (US) joined Israel in launching airstrikes on key Iranian nuclear sites, stoking fears of a wider regional crisis.

USD/JPY is surging higher during the European session, having breached its 100-day Moving Average (MA) to trade around 147.84 at the time of writing, up more than 1.15% on the day. The pair's strong upward momentum reflects the broad strength of the US Dollar as traders flock to the Greenback for safety, shrugging off upbeat Japanese Purchasing Managers' Index (PMI) data and focusing squarely on escalating geopolitical tensions.

Meanwhile, the US Dollar Index (DXY) climbed back above the 99.00 mark, holding firm around 99.25 as risk-off flows underpin renewed demand for the world's reserve currency.

Flash PMI data released earlier in the day showed Japan's private sector activity gathering momentum but failed to lend any support to the Yen. The au Jibun Bank Japan Composite PMI rose to 51.4 in June from 50.2 in May, marking the fastest pace since February and the third straight month of growth. Notably, the Manufacturing PMI returned to expansion territory for the first time since May 2024, rising to 51.3 from 48.6 previously and surpassing forecasts of 49.5. Meanwhile, the Services PMI edged up to 51.5 from 51.0.

The surge in global Crude Oil prices amid Middle East tensions is piling extra pressure on the Yen. Japan imports the vast majority of its energy needs, so the recent spike in oil prices since the Middle East conflict flared up is likely to worsen the country's trade balance. This growing import burden undermines investor appetite for the Yen, which is already losing ground to the resurgent US Dollar.

Citi analysts echoed this view in a recent client note, warning that "a rise in crude oil prices causes a deterioration not only in Japan's trade balance but also its terms of trade, so it fundamentally acts to weaken the yen." In their report, published by Reuters, Citi reiterated their forecast for the Japanese currency to slide further, targeting 150 per Dollar by September.