The Yen stabilised on Friday but was heading for its sharpest weekly decline in a year, as expectations for an imminent rate hike faded rapidly.
The Japanese currency gained 0.2% to 152.7 per US Dollar at the time of writing, staying close to Thursday’s weakest level since mid-February. For the week, the Yen is on track to fall 3.5%, marking its largest weekly drop since October last year.
The Yen’s sharp decline was driven by concerns that the Bank of Japan may hold off on further interest rate hikes this year, following fiscal dove Sanae Takaichi’s unexpected victory to lead the ruling party.
The outcome has fuelled speculation that Japanese authorities might need to intervene to support the currency, Reuters reports.
Finance Minister Katsunobu Kato said on Friday that the government was worried about excessive volatility in the foreign exchange market, while Takaichi noted on Thursday that she did not wish to cause an undue weakening of the Yen.
Markets continue to believe that under Takaichi’s leadership, it will be politically challenging for the Bank of Japan to proceed with further interest rate hikes.
Takaichi, who is poised to become Japan’s first female prime minister, stated on Thursday that while the Bank of Japan is in charge of monetary policy, its decisions should remain consistent with the government’s objectives.
Traders are currently assigning roughly a 45% probability of a rate hike at the BOJ’s December meeting, with markets fully pricing in a 25-basis-point increase by March.
Elsewhere, the Euro was last trading at $1.15705, hovering near the two-month low reached on Thursday and heading for a 1.5% weekly decline, its steepest in 11 months, as political turmoil in France pressured the single currency.
President Emmanuel Macron is once again searching for a new prime minister, hoping the next appointee can navigate a budget through a deeply divided legislature.
The ongoing political deadlock has made it increasingly difficult to pass the austerity measures demanded by investors concerned about France’s widening fiscal deficit.
In France, the political upheaval following prime minister Lecornu’s resignation has further eroded sentiment toward the Euro.
Volatility remains high across foreign exchange markets as traders reposition themselves amid evolving central bank expectations and mounting political uncertainties.
This has kept the US Dollar buoyant, with the Dollar index, which tracks the greenback against six major currencies, standing at 99.33, close to a two-month high. The index is on track for a 1.7% weekly gain, its strongest performance in a year.