The dollar extended its gains against the yen in Asian trading on Wednesday (November 11), hitting a high of 158.95, its highest level since late September, before trading around 158.85. The dollar strengthened as the latest inflation report solidified market expectations for a December rate hike by the Federal Reserve, providing strong support for the dollar. According to the CME FedWatch tool, the market is currently pricing in a roughly 90% probability of a rate hike next month.

US inflation: Overall at 0.4% and core at 0.3%, both exceeding expectations; 91% probability of a December rate hike.

The U.S. Consumer Price Index (CPI) rose 0.4% month-over-month in October, exceeding the expected 0.3%, although it slowed from September's 0.6%. The core CPI, excluding food and energy, rose 0.3%, unchanged from September and above the expected 0.2%. Due to last year's government shutdown, the Bureau of Labor Statistics omitted the October annual data this year. This set of data, including both the overall and core figures, exceeded expectations, and the core figure showed no signs of slowing, reinforcing the assessment that "inflationary pressures persist." The approximately 90% probability of an interest rate hike is the market's expression of this assessment—providing solid support for the dollar's interest rate differential expectations and offering a fundamental basis for the dollar's appreciation against the yen.

Safe-haven demand: Easing diplomatic tensions between the US and Iran create headwinds for the US dollar.

Despite positive inflation data, the US dollar may face headwinds from weakening safe-haven demand as hopes for a diplomatic solution to the US-Iran conflict rise. President Trump has hinted that further military strikes against Iran may no longer be necessary, and Secretary of State Rubio stated at the G7 summit that large-scale military action is no longer required. Meanwhile, congressional Democrats are considering using the upcoming government funding deadline to push the Trump administration toward a peaceful resolution. Progress in US-Iran de-escalation has weakened the dollar's safe-haven premium, creating two opposing forces with expectations of interest rate hikes—one of the reasons why the dollar/yen pair, while rising, has failed to break through key resistance.

Bank of Japan: Summary supports accelerating interest rate hikes, but several members warn against proceeding too quickly.

On the yen side, according to the summary of opinions from the October meeting, Bank of Japan policymakers expressed support for accelerating interest rate hikes after potential inflation reached the 2% target. One member explicitly urged the central bank not to be overly cautious in implementing the next rate hike, reinforcing expectations of a rate hike at the December meeting. However, the summary also highlighted lingering disagreements among policymakers: several members warned against acting too quickly given weak domestic consumption and uncertainty surrounding the sustainability of AI-driven demand. This divergence indicates that the Bank of Japan's hawkish stance provided support for the yen, but the cautious voices advising against "acting too quickly" limited the strength of this support—while a December rate hike was reinforced, the uncertainty surrounding the subsequent path limited the yen's upside potential.

Institutional View: The USD/JPY interest rate spread narrowed to 216 basis points, failing to hold above 220.

Some analysts have pointed out that the interest rate differential has softened slightly, with the spread between 10-year US Treasury yields and Japanese government bond yields narrowing to 216 basis points (-5 basis points), failing to hold above 220 basis points. They believe that the loss of momentum in the interest rate differential may help explain the USD/JPY pair's consolidation near recent levels ahead of key US data releases. Interest rate differentials are the core driver of the USD/JPY pair, and the current narrowing of the differential—albeit small—indicates that the dollar's upside lacks further expansion at the interest rate level; if the differential continues to narrow, the upside for USD/JPY will be limited, and the area around 158.90 is precisely the market's expression of this contradiction.

in conclusion

The USD/JPY pair extended its gains for the second consecutive day, reaching around 158.85. The core driver was the better-than-expected US CPI figures of 0.4% overall and 0.3% core, solidifying expectations for a December rate hike with a market-priced probability of approximately 91%, providing support for the dollar through interest rate differentials. However, easing tensions between the US and Iran weakened safe-haven demand, creating headwinds for the dollar. On the yen side, the Bank of Japan's October opinion summary showed that members supported accelerating rate hikes, with one urging "not to be overly cautious," but several members warned against a too-rapid pace due to weak domestic consumption and uncertainty surrounding AI demand, limiting the yen's support. Analysts pointed out that the 10-year USD/JPY interest rate differential narrowed to 216 basis points, failing to hold above 220, which may explain the consolidation tone of the USD/JPY pair – the interest rate differential is the core driver, and the current failure of the differential to expand further means that the upside potential for USD/JPY is limited by the ceiling of the interest rate differential. Short-term direction depends on the relative actions of the two central banks in December, and the further impact of US-Iran diplomatic progress on safe-haven demand. (USD/JPY daily chart, source: EasyForex) At 10:42 Beijing time, USD/JPY was trading at 158.83/84.