The U.S. dollar remained close to a two-week high on Friday, set for its best weekly performance since November, as a sell-off in stocks fueled by concerns over AI spending unsettled investors, while the yen strengthened in anticipation of a national election on Sunday. The dollar has appreciated following President Donald Trump’s nomination of Kevin Warsh as the next Federal Reserve Chair last week, as market participants anticipate he will not advocate aggressively for rate cuts, alleviating some concerns regarding central bank autonomy. The recent decline in technology stocks this week is driven by investor concerns regarding substantial expenditures on artificial intelligence and the potential widespread effects of rapidly evolving AI tools that may disrupt multiple industries.
The prevailing risk aversion has bolstered the dollar, even as U.S. Treasury yields have declined following economic data that suggests a weaker-than-expected jobs market, just ahead of next week’s eagerly awaited payrolls report for January. “The fact that we are getting such big moves is a sign the market is positioned the same way on long and short trades be it stocks, commodities, crypto and FX,” said Prashant Newnaha. The short USD position reflects a widely accepted strategy, and as market sentiment transitions from risk-on to risk-off, these commonly held positions are being adjusted.
The dollar index, which assesses the U.S. currency relative to six other currencies, stood at 97.961, remaining close to its peak since January 23. The index is poised for a 1% gain this week, marking its most significant increase since mid-November. According to economists, the noticeable deceleration in hiring indicates that the Federal Reserve might have been somewhat hasty in minimizing the risks related to employment in its mandate during the January policy meeting. Significant downward adjustments to payroll figures next week would increase the pressure to ultimately restart rate reductions,” they noted in a report. Market participants continue to factor in two rate cuts for the year, though the likelihood of a shift in June has slightly increased.
The yen appreciated to 156.74 in anticipation of the national election this weekend, where a potential victory for Prime Minister Sanae Takaichi appears likely. The recent vote has left investors feeling uneasy, as concerns over fiscal stability have triggered a tumultuous selloff in both the currency and bond markets. A continued decline could have far-reaching effects worldwide. “An outsized victory will reduce near-term constraints on Takaichi’s fiscal policy goals including reducing the consumption tax,” said Samara Hammoud. It is crucial to note that the method by which Takaichi intends to finance expansionary fiscal policy is still uncertain. Heightened apprehensions regarding Japan’s escalating government debt are likely to exert pressure on Japanese government bonds and the JPY.
The yen has remained at a near 18-month low against the dollar, leading Japanese policymakers to consistently signal potential action – a reference to market intervention – to support the struggling currency. The euro stood at $1.1784 following the European Central Bank’s decision to maintain interest rates, as anticipated on Thursday, while downplaying the influence of dollar fluctuations on its forthcoming choices. Sterling was experiencing significant declines, currently positioned at $1.3520 after a drop of nearly 1% in the prior session. The Bank of England maintained its interest rates on Thursday, following a surprisingly close 5-4 vote. The central bank indicated that borrowing costs may decrease if the anticipated decline in inflation proves to be enduring.