Dollar holds gains against yen, steadies ahead of Trump inauguration
Japan began circulating its first new banknotes in 20 years in Tokyo ·Reuters
Laura Matthews
Updated 6 min read
By Laura Matthews
NEW YORK (Reuters) - The dollar held gains against the yen on Friday, but ended the week lower after a six-week winning streak, as investors await Donald Trump's presidential inauguration and clarity on the course of the incoming administration's policies.
The yen was poised for its strongest weekly performance in over a month as expectations for a Bank of Japan rate hike next week grow, putting the dollar on the back foot.
It climbed more than 1% against the dollar this week, reversing last week's decline, and touched a one-month high of 154.98 per dollar earlier on Friday.
The greenback was last up 0.68% against the yen at 156.165.
"The yen is going to remain pretty married to U.S. rates," said Brad Bechtel, global head of FX at Jefferies. "I think this cooling we've seen this week has helped take the pressure off dollar-yen. The BOJ seems ready to hike next week, and at the margin, that'll be positive for the yen. But with interest rate differential still very wide, it's hard for dollar-yen to really move significantly lower."
Remarks from BOJ officials along with Japanese data that point to persistent price pressure and strong wage growth have helped boost market confidence that a rate shift is in the offing, with traders pricing in an 80% chance of a hike next week.
Sources also told Reuters that the central bank is likely to hike rates next week barring any market shocks when Trump takes office.
The dollar has surged in the past few weeks on the back of rising Treasury yields, reflecting expectations that President-elect Trump's policies could boost inflation when the U.S. economy is already strong.
But bond markets got relief from a relentless selloff after softer U.S. core inflation data on Wednesday, plus remarks from Federal Reserve Governor Christopher Waller on Thursday, who said three or four interest rate cuts were still possible this year if the data supported that.
This led markets to up their bets on Fed cuts this year, putting some pressure on the dollar ahead of Trump's return to the White House next week.
Money markets currently price in about 40 basis points in U.S. rate cuts in 2025.
"In response to softer-than-expected inflation data this past week, market participants increased their rate cut expectations from 25 to 40 basis points," said Uto Shinohara, senior investment strategist at Mesirow Currency Management.
"Notably, these market expectations have returned to levels seen just before last Friday's robust employment report, suggesting the two economic releases effectively canceled each other out."
It's a pattern that underscores the market's continued sensitivity to both inflation and labor market data, he added.
And as the Federal Reserve enters its blackout period, with few major U.S. economic releases scheduled next week, Shinohara said "markets will be focused on the beginning of the Trump presidency and its potential market impacts."
Investors are now awaiting Trump's inauguration speech on Monday to get a better sense of his policy steps and expecting volatility.
Sterling fell 0.6% to $1.2166, not far from the 14-month low it hit on Monday.
British retail sales fell unexpectedly in December, according to data on Friday that raised the risk of an economic contraction in the fourth quarter.
The euro was down 0.26% at $1.0276.
That left the dollar index, which measures the U.S. currency against six other units, up 0.34% at 109.33, away from a more than two-year high touched at the start of the week.
The index was set for a drop of about 0.25% in the week as of the afternoon session, which would snap a six-week run of gains.
China's yuan was last trading at 7.3249 per dollar after data showed the world's second-biggest economy grew 5.4% in the fourth quarter, significantly beating analysts' expectations. The results positioned full-year 2024 growth at 5%, meeting Beijing's target.
The Chinese currency remains vulnerable to potential tariff risks under a Trump presidency. President Xi Jinping and Trump held a telephone conversation on Friday, state media Xinhua reported on Friday.
"The USD remains solely focused on potential tariff announcements as we move into Trump's first days back in office," said Dan Tobon, head of G10 FX strategy at Citi.
"While tariffs are somewhat priced into FX markets, potential for elevated moves in the USD – both higher and lower – remain for next week. ... Market participants remain on edge as we await more concrete details on Trump's tariff policy."
Bitcoin, which hit a four-week high on Friday, was last up 5.26% at $105,404.13, amid hopes in the crypto industry that the incoming Trump administration will mark a shift in cryptocurrency policies.
(Reporting by Laura Matthews in New York; Additional reporting by Ankur Banerjee in Singapore and Greta Rosen Fondahn in Gdansk; Editing by Jane Merriman, Toby Chopra and Lisa Shumaker)
