U.S. Dollar Heads for Second Weekly Decline
The U.S. dollar moved slightly lower on Friday and was on course for a second consecutive weekly loss.
The main pressure came from a stronger Japanese yen. Reports suggested that Japan may encourage its largest pension fund to invest more heavily in domestic assets.
Renewed hopes for diplomatic talks between the United States and Iran also reduced demand for the dollar as a safe-haven currency.
The U.S. Dollar Index was broadly unchanged on the day. However, it was heading for a weekly decline of around 0.1%.
Japanese Yen Rallies From Multi-Decade Lows
The Japanese yen gained around 0.4%, while the USD/JPY exchange rate fell approximately 0.6% to 161.44.
The move offered some relief to the yen, which has traded close to a 40-year low against the U.S. dollar for several months.
The latest rebound followed reports that Japan is considering structural measures to strengthen domestic investment and support the currency.
Japan Considers Major Pension Fund Shift
Newly appointed Finance Minister Satsuki Katayama said Tokyo was studying ways to encourage the Government Pension Investment Fund to increase its exposure to Japanese assets.
The GPIF manages approximately 293.6 trillion yen, or around $1.81 trillion.
Because of its enormous size, even a modest change in the fund’s investment strategy could have a significant impact on global capital flows.
The possibility of redirecting part of its overseas investment back into Japan created immediate demand for the yen.
Japanese Government Bonds Rally
Japanese government bond prices also moved higher following the reports.
The yield on Japan’s 10-year government bond fell sharply as investors increased their exposure to domestic assets.
Bond yields generally move in the opposite direction to prices.
The proposed pension strategy could mark a broader shift in Japan’s efforts to support the yen.
Tokyo Looks Beyond Currency Intervention
Japanese authorities have spent more than a year trying to slow the yen’s decline.
Their measures have included direct intervention in currency markets, where officials bought yen and sold U.S. dollar reserves.
Policymakers have also repeatedly warned traders against excessive speculation.
However, these actions have had only a limited long-term effect.
The yen has remained weak because of the wide interest-rate gap between the United States and Japan.
The Federal Reserve has maintained relatively restrictive monetary policy, while the Bank of Japan has continued to follow a much looser approach.
Fed Rate Outlook Weighs on the Dollar
The U.S. dollar also came under pressure after minutes from the Federal Reserve’s June meeting showed significant disagreement among policymakers.
Officials remained divided over whether another interest-rate increase would be needed later in the year.
Recent signs of weaker payroll growth have also reduced expectations for aggressive Fed tightening.
As a result, some institutional investors have cut their bullish positions in the dollar.
U.S.-Iran Diplomacy Reduces Safe-Haven Demand
Developments involving the United States and Iran also influenced currency markets.
U.S. President Donald Trump initially said that the ceasefire with Iran had ended.
However, he later indicated that Iran had contacted Washington to discuss further negotiations.
The prospect of renewed diplomacy reduced fears of a wider conflict and weakened demand for the U.S. dollar as a safe-haven asset.
