The U.S. dollar hit its lowest point of the year on Friday, marking its third consecutive weekly decline, as traders reevaluated expectations around President Donald Trump’s second term and its impact on trade policy. Meanwhile, the Japanese yen surged to a two-and-a-half-month high, driven by stronger-than-expected inflation data from Japan.
The yen breached the 150-per-dollar mark overnight, reaching 149.285 per dollar during Asia’s morning trading, following news that Japan’s core inflation rate rose to its highest level in 19 months, registering a 3.2% annual increase for January, surpassing the 3.1% forecast.
The euro also saw a notable rise, gaining 0.8% overnight and stabilizing in Asia at $1.0498, with market participants looking ahead to a weekend election in Germany, where polls predict a win for a conservative coalition.
The dollar faced widespread losses as traders who had previously built up significant long positions—betting on a potential trade war under Trump’s leadership—began to reassess their positions. Although Trump imposed a 10% tariff on Chinese goods and discussed reinstating steel and aluminum tariffs from his first term, his administration has yet to follow through with broader tariffs, leading to market disappointment.
“It was a very one-sided trade and very heavy long positioning,” said Jason Wong, strategist at BNZ in Wellington. “Some of those longs are becoming impatient because the only thing he has done is put a 10% tariff on China. The market is taking some of that money off the table.”
Further supporting the yen’s rally, Japan’s inflation data has sparked speculation that the Bank of Japan might raise rates in the near future, especially as other central banks around the world are expected to cut rates. The yen has strengthened 3.6% against the dollar in February alone. Japanese bond markets were sold off on Friday, with interest rate markets now pricing in a 25 basis point rate hike by September.
In the commodity currencies, the Australian and New Zealand dollars benefitted from Trump’s remark that a trade deal with China was still possible, boosting the trade-sensitive currencies. Despite recent rate cuts in both countries, the Aussie and kiwi have reached their highest levels of the year. Australia’s currency briefly traded above 64 cents for the first time this year, while the New Zealand dollar touched $0.5772.
Additionally, Trump’s comment about a potential visit by Chinese President Xi Jinping to the U.S. pushed the Chinese yuan to a one-month high in onshore trade. Offshore, the yuan remained steady at 7.2419 per dollar on Friday.
As the dollar continues to face downward pressure, traders are closely monitoring geopolitical developments and inflation trends for further clues on the outlook for global currencies.
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