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

The dollar remained stable against major currencies on Friday, following a substantial sell-off in US equities that attracted investors to safe havens like the yen and pushed Treasury yields lower ahead of a key government payrolls report. The shift towards risk-averse assets was sparked by a Democratic victory in Congress, which had a negative impact on US stocks on Thursday.

The Nasdaq experienced its largest one-day decline since April 2025, causing widespread concern over the artificial intelligence industry and data center construction. This prompted investors to seek refuge in bonds and safe-haven currencies. The yen gained 0.2% to a one-week high of 157.40 US dollars, briefly reversing some of its gains.

The Swiss franc also strengthened against the US dollar by 0.2%. The dollar index, which tracks the greenback's performance against six peers, remained nearly unchanged at 101.55. Analysts from OCBC noted that the adverse effects of the AI sell-off were causing conflicting forces for the dollar, with falling US yields weakening its safe-haven appeal and the yen emerging as the leading hedge against potential US-centric volatility.

The flight to safety also drove the 10-year Treasury yield down to 4.84%, near its lowest level since September 10, while the two-year yield declined by approximately 10 basis points to 4.47%. This shift in bond markets was also influenced by revised expectations regarding Federal Reserve interest rate hikes, with fed funds futures reducing the likelihood of a 25-basis-point increase in December to around 70% from over 80% the previous day.

The euro remained flat against the dollar at $1.1222 but was expected to rise by 0.5% over the week, ending a two-week losing streak. The upcoming focus will be the US non-farm payrolls report, which investors will use to assess the Federal Reserve's rate policy. Recent data showed a positive outlook, with weekly initial jobless claims falling to 189,000, matching a 57-year low and below the 196,000 estimate from a Reuters poll of economists.

Analysts from MUFG expect this labour market improvement to persist, anticipating that the non-farm payrolls data will remain within a downward rate channel. They recommend buying dips in the market if the non-farm payrolls report is stronger than expected. Meanwhile, the British pound gained 0.1% to $1.3457, following the Bank of England's expected interest rate hike.