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

The US dollar remained relatively stable against other major currencies on Friday, following a significant decline in US equities that prompted investors to seek refuge in safe-haven assets like the yen and to lower Treasury yields in anticipation of a key government payrolls report. The political shift in Congress, where the Democratic party gained control, contributed to the market's risk-averse sentiment on Thursday, causing the Nasdaq to drop to its largest one-day decline since April 2025.

Concerns over tighter regulation in the artificial intelligence sector, particularly concerning data center construction, have unsettled global markets. In response to the equity rout, investors turned to bonds and haven currencies. The yen surged 0.2% to a one-week high of 157.40 US dollars before easing off some of the gain. The Swiss franc also appreciated by 0.2% against the US dollar.

The dollar index, which tracks the greenback's performance against six peers, hovered around 101.55, essentially unchanged. Analysts from OCBC noted that the AI sell-off is influencing two opposing forces for the dollar. Lower US yields are diminishing the dollar's appeal as a safe-haven asset, making the yen a more attractive hedge against US market volatility.

Additionally, inflows from Japan's Government Pension Investment Fund might further boost the yen's value. Treasury yields dropped overnight due to the flight to safety, reaching as low as 4.84% for the 10-year bond, close to its lowest since September 10. The two-year yield, more sensitive to interest rate expectations, fell about 10 basis points to 4.47%.

This shift in the bond market also reflected adjustments in Federal Reserve expectations, with the probability of a 25-basis-point rate hike in December falling to around 70% from over 80% on Wednesday. The euro held steady against the dollar at US$1.1222 but was expected to gain 0.5% for the week, ending two weeks of decline. Investors will closely watch Friday's US non-farm payrolls report, which could provide clues about the Federal Reserve's future rate policy.

The data released on Thursday showed a positive trend, with weekly initial jobless claims falling to 189,000, the lowest level since July 1960 and below the 196,000 estimate in a Reuters poll of economists. Market analysts expect this labor market improvement to continue, particularly if the upcoming non-farm payrolls report is better than expected.

In other currency news, the British pound briefly rose 0.1% to US$1.3457 after the Bank of England raised its policy interest rate as expected.