Investing.com – The U.S. dollar drifted marginally lower Friday, with activity muted ahead of the widely-watched monthly U.S. jobs report, and the Japanese yen set for its next week in more than a year.

At 04:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 105.110, on course for its worst week in almost two months. 

Dollar on back foot ahead of payrolls

The dollar has been on the back foot for most of this week, after Fed Chair largely ruled out rate hikes, signalling that the U.S. central bank was still leaning towards eventual rate cuts, even if they may take longer to come than initially expected.

“The post-FOMC bias has been markedly bearish on the dollar, and despite the U.S. payrolls risk event today, markets have continued to squeeze USD long positioning yesterday and overnight,” said analysts at ING, in a note.

Attention now turns to the closely-watched U.S. monthly employment report.

likely increased by 238,000 jobs last month after rising 303,000 in March, while the is seen holding below 4% for the 27th straight month. 

Powell made it clear the importance of the upcoming economic data as far as policy decisions are concerned, after the U.S. central bank held interest rates unchanged on Wednesday.

Financial markets continue to expect the central bank to start its easing cycle in September, but strong numbers could see this window start to close. 

“All in all, our 210k call for payrolls means we do not expect today’s data to dent the bearish dollar momentum as markets may fully price in a cut in September and keep short-term USD rates capped,” ING added.

Eurozone manufacturing still weak

In Europe, traded 0.2% higher to 1.0743, helped by the recent dollar weakness.

However, the recent economic news out of the eurozone has hardly been helpful, with falling 0.3% on the month in March, according to data released earlier Friday.

The eurozone’s manufacturing sector remained in contraction territory in April, according to the final release on Thursday, while the VDMA association reported that German manufacturers deepened a decline in their order books in March.

The has signalled a rate cut in June, but there remains a great deal of uncertainty over what happens with monetary policy after this.

traded 0.2% higher to 1.2555, following the release of the number.

This showed an increase to 55.9 in April, from 53.1 the prior month, suggesting that the U.K.’s dominant services industry remains in a healthy state, potentially offering the Bank of England room to delay interest rate cuts.

Yen on course for hefty weekly gain

In Asia, fell 0.2% to 153.26, with the pair on course to report a weekly loss of well over 3%, its largest since December 2022.

Japanese authorities have been linked with intervention to support its currency this week to the tune of some 9.16 trillion yen ($59.8 billion), as suggested by data from the Bank of Japan.

These forays into the currency market have tended to occur during periods of thin liquidity, with the country out for a holiday on Monday while the second attempt happened late on Wednesday after Wall Street had closed.

“The second round of JPY intervention in one week, deployed after a less hawkish than expected FOMC on Wednesday, has sent markets the message that the Ministry of Finance is less tolerant of a post-intervention depreciation of the yen this time,” ING said.

Broader Asian currencies rose slightly, capitalizing on an overnight drop in the dollar. 

pair rose 0.3% to 0.6579, as markets positioned for potentially hawkish signals from the next week. Hotter-than-expected Australian inflation readings saw markets largely price out expectations of any rate cuts by the RBA in 2024, offering the Aussie some strength.

By Ankur Banerjee and Rae Wee

SINGAPORE (Reuters) – Japan appears to have bought some time and respite for a tumbling yen through its latest bursts of suspected , yet it has also set itself up for a protracted war with a market that views the currency as a compelling sell, analysts say.

Traders estimate the Bank of Japan (BOJ) spent nearly $59 billion defending the currency this week, helping to put the yen on track for its best weekly performance in over a year.

The Japanese currency is up 5% from the 34-year low of 160.245 it plumbed on Monday. Tokyo is yet to confirm it had intervened.

But this week’s rally has been anything but linear in a market decidedly bearish on the currency, given the massive gap between its ultra-low yields and those in other major economies.

The yen has swung wildly during the suspected intervention bouts, gaining nearly 5 yen in a matter of minutes and relinquishing part of that speedily.

“Nothing’s actually changed,” said Rob Carnell, head of Asia-Pacific research at ING. “I think this has provided a momentary pause in what will inevitably be tested by markets again, who will see this as free money when they take on the BOJ….”

Carnell says the yen has become “a trader’s dream”, as they can make easy money by simply buying dollars for yen, waiting for the pair to rise and then selling it as the BOJ steps in to support the yen.

“You’d be mad not to test it, knowing that they will step in at some stage,” he said.

Before this week’s suspected forays into the market, Japanese authorities last intervened between September and October in 2022 spending around $60 billion to defend the currency.

The yen was then near 152 per dollar, but within two months of that intervention it was sliding again. It had shed 20% more of its value against the greenback when it hit 1990 lows this week.

“Because of the wide rate differentials, speculators will still be on the other side of this trade,” said Kaspar Hense, a senior portfolio manager at BlueBay Asset Management.

The spread between the benchmark 10-year U.S. Treasury and Japanese government bond yields is nearly 4 percentage points.

NO TARGETS

Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management, says Japan’s Ministry of Finance, whose mandate it is to manage the yen, is well aware of how monetary settings are stacked against the yen and is only acting to contain the pace of depreciation.

“Intervention comes at a cost, and I think the MOF would be unwilling to throw money at a specific target,” he said.

Even after the BOJ’s landmark move away from negative rates in March, the yen remains the cheapest major currency to borrow and short-sell, sealing its fate.

Analysts say that complicates forecasts for the yen, but it appears like the 160 level is one the BOJ wants to protect.

Hirofumi Suzuki, chief currency strategist at Sumitomo Mitsui (NYSE:) Banking Corporation in Tokyo, reckons Japanese authorities find the decline after their March meeting “speculative and unacceptable” and might be aiming to get the yen back to 155 to a dollar where it was before that momentous policy decision.

Yujiro Goto, head of currency strategy for Japan at Nomura, feels the authorities merely want to help their importers get the dollars they need.

“I think 150 is ideal for Japanese importers. I think around the 152–152.50 level is probably what MOF wanted to have, but it didn’t hit that level, so there is a risk that MOF might come back for another round.”

Speculators also realise that the government’s war chest isn’t bottomless. Japan has about $1.3 trillion in currency reserves, but only around $155 billion that it holds in dollar deposits are liquid.

Meanwhile, Federal Reserve rate cut bets are receding as the U.S. economy and labour markets stay hot. Speculative short yen positions have run up to their largest in 17 years.

Fred Neumann, chief Asia economist at HSBC, says Japan is only trying to end the asymmetric one-sided speculation, rather than defend any yen levels.

“Given the reality of higher U.S. interest rates for longer, this is an expectations management exercise. It’s not an exercise to necessarily deliver a rapid appreciation of the yen,” he said. 

($1 = 152.8600 yen)

Investing.com– Most Asian currencies rose slightly on Friday, capitalizing on a drop in the dollar as markets hunkered down before key U.S. payrolls data that is likely to factor into interest rates. 

The dollar was also pressured by a rebound in the Japanese yen, which pulled further away from 34-year lows amid what appeared to be government intervention in currency markets. 

Weakness in the dollar offered some breathing room to regional currencies, although they were still nursing steep losses on the prospect of U.S. interest rates remaining high for longer. 

Japanese yen firms amid likely intervention, USDJPY at 3-week low

The Japanese yen saw extended gains on Friday, with the pair- which moves inversely to strength in the yen- falling 0.4% to 153.02. The pair briefly hit a three-week low of 152.9. 

The USDJPY pair was set to lose about 3.4% this week as it tumbled from 34-year highs. Traders and analysts attributed the drop largely to currency market intervention by the Japanese government.

The USDJPY pair had surged to 160 earlier this week. Traders said this level was the new line in the sand for currency market intervention. 

Domestic Japanese markets were closed on Friday. But the lower volumes also aided the yen. 

Still, the factors that had spurred recent yen weakness remained in play, chiefly the prospect of high-for-longer U.S. interest rates. 

Broader Asian currencies rose slightly, capitalizing on an overnight drop in the dollar. The Australian dollar’s pair rose 0.2%, as markets positioned for potentially hawkish signals from the next week. Hotter-than-expected Australian inflation readings saw markets largely price out expectations of any rate cuts by the RBA in 2024, offering the Aussie some strength. 

Trading volumes in Asia remained muted on account of market holidays in Japan and China.

The South Korean won’s pair fell 0.3%, while the Singapore dollar’s pair fell 0.1%.

The Indian rupee’s pair fell slightly, and was trading well below record highs hit in April. 

Dollar steadies from overnight losses, nonfarm payrolls awaited 

The and steadied in Asian trade after tumbling in overnight trade, as pressure from the yen and expectations of no more interest rate hikes by the Federal Reserve dented the greenback. 

Focus was now squarely on data for April, which is due later in the day. The reading has consistently beaten estimates for the past five months, with any signs of persistent labor market strength giving the Fed more headroom to keep rates high for longer.

The Fed signaled earlier this week that it had no plans to cut rates in the near-term, especially in the face of sticky inflation.