Yen Strengthens Against Dollar with Fed Rate Cut Speculation
The Japanese yen strengthened beyond 161 per dollar, recovering slightly from its lowest point in 38 years. This gain was primarily due to a weakening US dollar, as disappointing US economic data reinforced expectations that the Fed might begin reducing interest rates as early as September. Concerns about potential government intervention also supported the yen, as Japanese authorities had spent nearly 10 trillion yen from late April to late May to stabilize the currency after it fell below the 160 per dollar mark. However, the yen remained under pressure due to significant interest rate differentials between Japan and other major economies, prompting investors to borrow yen and invest in higher-yielding currencies. Additionally, the Bank of Japan's cautious approach to adjusting monetary policy added to the yen's challenges, despite growing speculation that the BoJ might raise rates at its upcoming policy meeting in late July. Furthermore, the BoJ had announced plans to outline the phasing out of its bond purchasing program later this month.
On Friday, the dollar index maintained its recent decline around 105, staying near three-week lows before the US jobs report which potentially will reveal further signs of a cooling labor market. Earlier in the week, data highlighted an unexpected contraction in services activity and disappointing private employment figures in the US, reinforcing a dovish sentiment towards Fed policy. Currently, markets are pricing in a roughly 73% probability of rate cuts by the Fed starting in September. Externally, the dollar encountered pressure from a strengthening euro following concerns expressed by ECB policymakers about recent inflation trends. Meanwhile, the British pound strengthened on indications from polls suggesting a decisive victory for the Labor Party in the upcoming UK general election.
Gold rose to approximately $2,360 per ounce on Friday and was on track for its second weekly gain. Earlier in the week, data revealing a surprise contraction in US services activity and disappointing private employment figures supported a cautious outlook on Fed policy. Markets currently expect a 73% likelihood of Fed rate cuts beginning in September. Political developments in Europe were under watch, including the Labor party victory in the UK general election and projections that Marine Le Pen's National Rally party would fall short of a majority in France's parliamentary election. Additionally, escalating geopolitical tensions in the Middle East, involving Israel's dual challenges with Hamas and Hezbollah, continued to support demand for gold as a safe-haven asset.