Yen Nears Three-Month Low Amid Election Uncertainty

By Rae Wee
SINGAPORE (Reuters) – The yen lingered near a three-month low on Friday, facing a potential fourth consecutive weekly loss before Japan's weekend election, which may challenge the Bank of Japan's (BOJ) plans to normalize policy.

In the broader market, the dollar retreated from recent highs, following a decline in U.S. Treasury yields, yet remained on track for another weekly gain.

Japanese citizens will vote on Sunday, with polls indicating that the ruling Liberal Democratic Party (LDP) could lose its long-standing dominance. This uncertainty raises concerns about future BOJ rate hikes, as the central bank aims for a smooth transition from near-zero interest rates, with its next meeting scheduled for October 30-31.

The yen was last down 0.1% at 152 per dollar and is set for a 1.5% weekly loss. Earlier, it appreciated slightly following better-than-expected Tokyo inflation data, though core consumer prices fell below the BOJ’s 2% target for the first time in five months.

Ray Attrill, head of FX strategy at National Australia Bank, noted the potential for significant market reactions if the LDP loses its majority, suggesting that this could delay future rate increases. The yen has depreciated approximately 5.5% this month, potentially marking its worst decline since April 2022, igniting speculation of possible intervention by Japanese authorities to stabilize the currency.

A senior official from Japan’s finance ministry revealed that Finance Minister Katsunobu Kato and U.S. Treasury Secretary Janet Yellen discussed recent exchange rate developments in a meeting on Thursday.

Dollar Strength

The dollar's climb paused on Friday after reaching a three-month high earlier in the week, driven by tempered expectations around aggressive Federal Reserve rate cuts and rising speculation about Donald Trump’s potential return to the presidency.

Against the dollar, the euro traded at $1.08225, moving away from a low of $1.076125 earlier this week, though it still targeted a 0.4% weekly loss. Recent data indicated stagnation in eurozone business activity, with Germany's contraction easing compared to prior months.

Nick Rees, a senior FX market analyst at Monex Europe, stated that the short-term outlook for the eurozone appears grim, driven by weak demand, a cooling labor market, and declining price pressures and business confidence.

The British pound dipped 0.06% to $1.2969 but edged away from a two-month low of $1.2908. It is on track for a 0.6% weekly drop.

Additionally, the Australian dollar decreased 0.11% to $0.6634, while the New Zealand dollar fell 0.22% to $0.6003, each predicted to decline roughly 1% weekly amidst dollar strength and U.S. election uncertainties.

The dollar index rose 0.04% to 104.09 after reaching a three-month high of 104.57 earlier this week, indicating a rise of 0.6% for the week—marking four consecutive weeks of gains.