Dollar holds, yen gains as equity rout saps risk appetite ahead of payrolls

On Friday, the dollar maintained its position against major currencies, as a significant decline in US equities spurred investors towards safe-haven assets like the yen and led to lower Treasury yields. This shift in sentiment occurred ahead of a highly anticipated government payrolls report. The Democratic takeover in Congress had caused a sharp drop in US stocks on Thursday, with the Nasdaq experiencing its steepest one-day decline since April 2025.

Concerns about heightened scrutiny of the artificial intelligence industry, particularly concerning data center development, had added to market turbulence. Consequently, the yen gained 0.2%, reaching a one-week high of 157.40 against the US dollar. However, the yen weakened slightly from that peak. The Swiss franc also strengthened marginally by 0.2% against the dollar.

The dollar index, which tracks the greenback's performance against six counterparts, remained relatively unchanged at 101.55. The AI sector's selloff presented contrasting influences on the dollar, according to OCBC analysts. Falling US yields diminished the dollar's safe-haven allure, making the yen the most prominent refuge against additional US-specific volatility.

Furthermore, a recent influx of funds from Japan's Government Pension Investment Fund may provide further support for the yen. The 10-year Treasury yield decreased overnight, settling at 4.84% in the Asian morning, nearing its weakest level since September 10. The two-year yield also experienced a decline of around 10 basis points, to 4.47%.

This adjustment in bonds reflected a reassessment of expectations surrounding the Federal Reserve's interest rate policy, with fed funds futures lowering the likelihood of a 25-basis-point rate increase in December to approximately 70% from over 80% earlier in the week. The euro remained stable against the dollar at $1.1222 but was anticipated to climb by 0.5% for the week, ending a two-week period of losses.

The focus would shift to the release of Friday's US non-farm payrolls report, which would help investors assess the Federal Reserve's rate outlook. Positive pre-releases included a decline in weekly initial jobless claims to 189,000, matching the 57-year low in July and below the 196,000 estimate from a Reuters poll of economists.

MUFG analysts noted that improving labor market data could continue with the upcoming non-farm payrolls report. As Treasury yields have fallen considerably, traders suggested buying any significant price dips on the stronger-than-expected payrolls data. The British pound rose by 0.1% to $1.3457 after the Bank of England raised its interest rates as expected.