The U.S. dollar edged lower on Friday after weaker-than-expected employment data reduced concerns about further aggressive Federal Reserve rate hikes.
Meanwhile, stronger inflation figures from Tokyo supported the Japanese yen, while hotter-than-expected eurozone inflation kept pressure on the European Central Bank to maintain a restrictive monetary policy.
Dollar Weakens After Soft U.S. Jobs Data
The U.S. Dollar Index slipped by around 0.2% following the weaker labor-market figures.
Despite the decline, the dollar remained on track to gain roughly 1% for the week. That would mark its third consecutive weekly advance.
The greenback also remained close to its strongest levels since April 2025.
Recent signs of resilience in the U.S. economy have supported expectations that the Federal Reserve could keep interest rates elevated for longer.
However, softer employment data may reduce the urgency for additional rate increases.
Fed Rate Expectations Remain in Focus
Investors continue to closely monitor U.S. economic data for clues about the Federal Reserve’s next move.
Recent Personal Consumption Expenditures inflation figures showed some moderation in price pressures.
However, underlying inflation remains above the Fed’s 2% annual target.
A weakening labor market combined with softer inflation could give policymakers more room to remain patient before considering further monetary tightening.
Currency traders will therefore continue watching upcoming employment and inflation reports for signs of whether the U.S. economy is cooling.
Global Bond Sell-Off Keeps Currency Markets Cautious
Broader foreign exchange markets remained relatively subdued as investors assessed continued volatility in global bond markets.
Government bond yields have risen sharply in recent weeks, while higher energy prices have renewed concerns about persistent inflation across major economies.
The combination of elevated borrowing costs and rising energy expenses has created uncertainty over the direction of global monetary policy.
Japanese Yen Gains on Hot Tokyo Inflation
The Japanese yen strengthened against the dollar after Tokyo inflation data came in stronger than expected.
USD/JPY fell by around 0.2% as investors increased expectations for additional tightening from the Bank of Japan.
Both headline and core inflation in Tokyo climbed to their highest levels since November 2025.
The readings remained comfortably above the Bank of Japan’s 2% inflation target.
Bank of Japan Rate Hike Expectations Increase
The latest inflation data reinforced expectations that the Bank of Japan could continue raising interest rates.
The BOJ recently delivered a 25-basis-point rate hike, and investors are now considering the possibility of further tightening in the months ahead.
Expectations for additional rate increases also supported demand for Japanese government bonds.
Japan’s benchmark 10-year government bond yield eased after reaching its highest level in around three decades earlier in the week.
Eurozone Inflation Surges to 3.8%
Inflation also accelerated sharply across the eurozone.
Headline inflation rose to 3.8% in September from 3.2% in the previous month.
The reading exceeded market expectations of around 3.6%.
Higher natural gas and fuel prices were the main drivers behind the increase.
Core Inflation Also Moves Higher
Core eurozone inflation, which excludes volatile food and energy prices, increased to 2.5% from 2.4%.
Higher service-sector prices were a major contributor to the increase.
Although core inflation remains relatively contained compared with headline inflation, both measures continue to exceed the European Central Bank’s 2% target.
ECB Faces Renewed Rate Hike Pressure
The sharp increase in headline inflation creates another challenge for the ECB.
Persistently high energy prices could strengthen arguments from policymakers who believe additional interest rate hikes may be necessary.
At the same time, the relatively modest rise in core inflation could encourage the ECB to maintain a more gradual approach.
The central bank has already raised rates twice during the summer, making incoming inflation and economic data particularly important for future policy decisions.
Euro Remains Near One-Year Lows
The euro gained less than 0.1% in early trading but remained close to its weakest levels in more than a year.
Despite stronger eurozone inflation figures, the single currency was still heading toward a weekly decline of more than 1.2%.
That would represent its worst weekly performance since May 2026.
For currency markets, attention now remains focused on the Federal Reserve, ECB and Bank of Japan as traders assess how inflation, employment and bond-market conditions could influence the next round of interest rate decisions.
