A surge in energy prices, triggered by the closure of the Strait of Hormuz amid ongoing conflict in the Middle East, is exerting significant pressure on global currencies and central banks. Japan, which imports 90-95% of its oil, is particularly vulnerable. The Bank of Japan (BOJ) faces a policy dilemma: whether to hike rates to defend the yen or maintain low rates to support a fragile economy. At its March 18–19 meeting, the BOJ held its benchmark rate at 0.75%, but the board remains split, with hawkish members warning that yen weakness is now a tax on households and small businesses, while doves caution that tightening could stifle growth without addressing imported inflation. Import prices rose 2.8% year-over-year in February 2026, the fastest since July 2024, with fuel and food costs climbing 5-7% annually and core inflation at 1.6%—close to the BOJ’s 2% target. Market participants are pricing a 70% chance of an April BOJ rate hike, with Governor Ueda hinting at possible action. However, Tokyo's March core CPI rose only 1.7% year-over-year, below expectations due to subsidies, and underlying measures remain firm. The Q1 Tankan business survey is expected to provide further guidance for the BOJ's next steps [1][3][6].
The Japanese yen has shown slight strength against major peers amid speculation of possible BOJ intervention, with Governor Ueda emphasizing the impact of FX market changes on the economy and prices. However, softer Tokyo CPI data and weak factory output (-2.1% m/m in February) and retail sales (-0.2% y/y) have tempered expectations for immediate tightening. The GBP/JPY and EUR/JPY crosses remain subdued, with GBP/JPY near multi-week lows and EUR/JPY trading around 182.90. The UK economy grew 0.1% in Q4 2025, but business investment fell 2.5%, and the Bank of England's hawkish stance amid inflation fears adds downside risks for the pound. In Europe, the preliminary Eurozone HICP for March is expected at 2.7% year-over-year, up from 1.9% in February, driven by higher energy prices, while core inflation is steady at 2.4%. Economists suggest that accelerating price pressures could prompt a more hawkish ECB, but Commerzbank analysts argue the ECB still lags the Fed in real policy support, with euro area inflation expectations rising more sharply than in the US. As a result, USD strength is expected to persist if the war continues [2][3][6][7].
The US Dollar Index (DXY) remains near a 10-month high at 100.50, reflecting a bullish bias despite a slight pullback after five days of gains. The DXY may appreciate further toward 101.90, with primary support at 99.97. The USD has been the weakest against the British Pound in recent trading, but overall, the Greenback maintains its strength. The USD/CAD pair hit a fresh 2026 high at 1.3945, with the USD appreciating for the seventh consecutive day against the Canadian dollar. Market sentiment remains risk-averse, with Asian markets posting moderate losses, although European and Wall Street futures point to a positive opening. US President Donald Trump has signaled a willingness to end the Iran war within four to six weeks, but tensions remain high, with threats to Iran's energy infrastructure and ongoing missile attacks. Fed Chair Jerome Powell has indicated that inflation pressures remain anchored, cooling expectations for an immediate US rate hike and putting downward pressure on Treasury yields and the USD [4][5][7].
Overall, the combination of energy shocks, geopolitical uncertainty, and diverging central bank responses is fueling volatility across major currency pairs and complicating the policy outlook for the BOJ, ECB, and Fed.
CONCLUSION
The ongoing energy shock and Middle East conflict are amplifying inflationary pressures and forcing central banks into difficult policy decisions. The BOJ faces mounting pressure to hike rates, while the ECB is seen as lagging the Fed in real policy support. Currency markets remain volatile, with the USD retaining its strength amid global uncertainty.