The Japanese yen stabilized on Friday, but was still on track for its sharpest weekly decline in a year, while the euro remained near two-month lows due to political turmoil in France.
Yen Weakness and BOJ Expectations
The yen firmed slightly to per US dollar but was still nearing its mid-February low, looking at a
weekly drop. This drastic depreciation was sparked by fading expectations for a near-term rate hike from the Bank of Japan (BOJ) following fiscal conservative Sanae Takaichi’s surprising victory to lead the ruling party.
The drop has raised concerns about a need for Japanese authorities to intervene to support the currency. Finance Minister Katsunobu Kato expressed concern about excessive currency volatility, and Takaichi stated that while the BOJ sets policy, it must align with the government’s economic goals. Traders are currently pricing in only a chance of a BOJ rate hike in December.
Euro’s Plunge Due to French Politics
The euro was set for its largest weekly fall in 11 months, holding steady at $1.1564. The single currency is being heavily weighed down by the political crisis in France, where President Emmanuel Macron is seeking his sixth prime minister in under two years. This political deadlock makes it difficult to pass a belt-tightening budget, alarming investors about France’s rising deficit. Poor economic data from Germany, a key euro-zone economy, further increased the euro’s susceptibility to the French political turbulence.
Dollar and Fed Outlook
As a result of the weakness in the yen and the euro, the US dollar index neared two-month highs and was poised for its largest weekly gain in a year ().
With the US government shutdown continuing to limit the release of key economic data, markets are focused on Federal Reserve commentary. New York Fed President John Williams indicated he would be comfortable with cutting interest rates again. Traders are now pricing in a chance of a
basis-point rate cut by the Fed in October, although the probability of a further cut in December has decreased slightly.
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