Yen Soars on BoJ Hike Bets, Oil Prices Skyrocket Amid Middle East Tensions

The yen has been on a strong run against the dollar, dropping by 4.2% since September 1 to a seven-month low, with the Japanese currency also performing well against other major currencies.

This move is largely attributed to growing expectations of a Bank of Japan (BoJ) interest rate hike, which has reached an 80% chance according to markets. In contrast, there's only a 50% chance of a Federal Reserve (Fed) rate hike over the next 16 months.

The BoJ is expected to tighten its monetary policy by 111bps by the end of 2027, whereas the Fed is projected to raise rates by just 50bps. This divergence in central bank expectations has led to the yen's strength, with the BoJ's rate hike bets being a key driver.

The Japanese currency's gains are also supported by strong economic data, including revised Q2 GDP growth and multi-decade high headline earnings. However, this may change towards the end of the week if US data releases and Treasury buyback operations lead to a reduction in tightening expectations.