Euro, yen on pace for weekly declines amid political upheavals in France, Japan

Investing.com - The euro and the yen both firmed against the U.S. dollar on Friday, but were still on pace for steep weekly declines, as investors weighed political drama in France and waning odds of a near-term interest rate hike in Japan.

By 05:27 ET (09:27 GMT), the euro had ticked up slightly versus the greenback to $1.1571, although the single currency remained on track for its largest weekly drop in 11 months.

French President Emmanuel Macron has set a deadline for today to name his sixth pick for Prime Minister in just under two years, following the collapse of a previous government under previous -- and short-lived -- premier Sebastien Lecornu.

Bank of France Governor Francois Villeroy de Galhau warned that the upheaval will likely cost France -- Europe’s second-largest economy -- at least 0.2 percentage points of growth and could increasingly sap both business and consumer confidence.

Markets will be keeping close tabs on the situation, he told a French radio station.

Yen reverses some losses after strong inflation data, intervention chatter

The Japanese yen strengthened marginally on Friday, with the USD/JPY pair falling nearly 0.3% from an eight-month high. 

Producer price index data for September, released earlier in the day, read stronger than expected, pointing to a potential increase in broader inflation last month.

The figures come as the Bank of Japan has largely maintained its stance that interest rates will increase in tandem with price gains. However, the BOJ is widely expected to face resistance from the government over its hiking plans, especially with fiscal dove Sanae Takaichi now likely to become the country’s next prime minister. 

Takaichi’s election as the leader of the ruling Liberal Democratic Party triggered steep declines in the yen this week, as markets bet on more fiscal spending and accommodative policy under her government. 

The yen was nursing a nearly 4% decline this week, its worst fall since October 2024. 

But outsized weakness in the yen spurred speculation over whether the government will intervene in currency markets. Japanese Finance Minister Katsunobu Kato added to these rumors on Friday, saying the government was concerned about “one-sided, rapid moves” in currency markets.

Bolstered in large part by the faltering euro and yen, as well as renewed debate over just how deeply the Federal Reserve is willing to cut rates, the dollar is heading towards its best week in a year.

The U.S. dollar index, which tracks the greenback against a basket of currency peers, last dipped by 0.2% to 99.34, but was hovering around two-month highs.

"Markets are quite clearly rethinking popular short-USD trades, but further gains may prove harder to sustain unless markets start to price out Fed easing," analysts at ING said in a note.

"The dollar can consolidate some gains today, but remains at risk of corrections in our view, and another rally would start to bring the greenback dangerously far from what short-term rate differentials justify."

(Ambar Warrick contributed reporting.)