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

The dollar index remained steady at 101.55 on Friday after a sharp sell-off in US equities prompted investors to seek refuge in safe-haven assets like the yen. This reaction followed a Democratic sweep in Congress, which caused a significant drop in US stocks on Thursday, with the Nasdaq experiencing its largest one-day decline since April 2025.

Worries surrounding tighter regulations on the artificial intelligence industry and its impact on data center construction added to the market turbulence. As a result, the yen surged 0.2% to a weekly high of 157.40 per US dollar, only to retract some of its gains. The Swiss franc also climbed 0.2% against the US dollar. While the dollar index stayed relatively flat, analysts noted conflicting forces at play.

Falling US yields diminished the dollar's safe-haven appeal, making the yen the most attractive hedge against further US-centric volatility. Additionally, Japan's Government Pension Investment Fund's inflows may provide further support for the yen. The 10-year Treasury yield decreased overnight, settling at 4.84%, near its lowest level since September 10, reflecting a shift in Federal Reserve expectations.

Fed funds futures now foresee a 25-basis-point rate hike in December at a probability of around 70%, down from over 80% on Wednesday. The euro held steady against the dollar at US$1.1222 but was set to rise by 0.5% over the week, reversing two weeks of losses. Investors eagerly await Friday's US non-farm payrolls report to assess the Federal Reserve's rate trajectory.

Recent data revealed an encouraging prelude, with weekly initial jobless claims dropping by 6,000 to 189,000, matching a 57-year low in July and below the 196,000 estimate from a Reuters poll of economists. MUFG analysts anticipate this report to confirm continued improvement in the labor market. With bond yields having significantly declined ahead of Friday's release, they suggest buying any notable dip in Treasuries if the non-farm payrolls data remains below expectations.

The British pound climbed 0.1% to US$1.3457 following the Bank of England's anticipated interest rate hike.