The focus of the foreign exchange market in the second half of 2026 has shifted to the Warsh Fed and the Takaichi administration's policy stance, while lower oil prices could ease pressure on the yen to weaken. Goto Yujiro (後藤祐二朗) of Nomura Securities explains the anticipated scenarios.
The dollar-yen exchange rate is expected to remain elevated after the start of the second half of 2026, with the firm dollar trend expected to continue following the deterioration in the Middle East situation and the rise in oil prices during the first half. A 25-basis-point rate hike is priced in ahead of the July FOMC, and interest-rate trends are cited as a factor supporting dollar strength.
If the Warsh Fed were to move to a surprise rate hike, changes in its policy stance and communications could intensify the market reaction and raise expectations of further rate hikes. Conversely, if a July rate hike were deferred, the dollar's upward momentum would likely weaken.
A change in the Takaichi administration's economic policy stance could help ease pressure on the yen to weaken. Attention is focused on changes in policy implementation, including the addition of language after publication of the draft Basic Policy and references to the Bank of Japan's independence.
If oil prices remain low and stable, Japan is expected to establish a trade surplus from year-end onward after a deterioration in the trade balance over the summer, potentially weakening supply-and-demand pressure on the yen to weaken. Uncertainty over the situation in the Middle East remains, but a large-scale resumption of fighting is considered unlikely.