USD/JPY Pressured as US 2-Year Yields Hit Highest Since Feb 2025

US 2-year Treasury yields have surged to their highest levels since February 2025, reflecting growing market expectations that Federal Reserve Chair Kevin Warsh may deliver a rate hike at the July 29 FOMC meeting. The Fed funds rate currently sits at 3.50-3.75% following three consecutive cuts in September, October, and December 2025. BMO's head of US rates strategy Ian Lyngen notes that Warsh's refusal to provide forward guidance has left markets pricing in a 'July surprise,' driving consistent cheapening in the 2-year sector. The yield spike is providing a tailwind for the US dollar, particularly against low-yielding currencies like the Japanese yen and Swiss franc. USD/JPY faces competing forces as higher yields support dollar demand while geopolitical tensions encourage safe-haven yen buying. EUR/USD is also under pressure as the rate differential narrative favors the greenback. Traders should watch for any pre-FOMC commentary from Fed officials that could further clarify the policy outlook and drive short-term positioning in dollar pairs.