NEW YORK: The dollar strengthened against the yen on Friday, but remained on track to end 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 0.52% against the yen at 155.915.
“The market has a Bank of Japan 25-basis-point hike nearly fully discounted,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
“What could go wrong with that is if the inauguration and Trump’s first couple of days could roil the market, then the BOJ would probably hold off raising interest rates and that would be negative for the yen.”
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 US economy is already strong.
But bond markets got relief from a relentless sell-off after softer US 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 US rate cuts in 2025.
“Obviously, Trump Inauguration Day and the rumored to be 100 executive orders that are potentially going to be coming about, that’s kind of keeping everybody on the edge of their seat, waiting to see how all that plays out,” said Brad Bechtel, global head of FX at Jefferies in New York.
Investors are now awaiting Trump’s inauguration speech on Monday to get a better sense of his policy steps, with a volatile period for markets expected ahead.
Sterling was down 0.4% at $1.2196, 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 remained flat at $1.0305.
That left the dollar index, which measures the US currency against six other units, up 0.1% at 109.06, away from a more than two-year high touched at the start of the week.