Dollar Retreats, Yen Surges as Intervention Risk Escalates

The US dollar gave back part of its weekly gains on Friday as it weakened against several major currencies, but still remains on track for its first back-to-back weekly gain in more than three months.

This partial retracement is not a reversal of the rates story, with elevated Fed hike expectations and Treasury yields continuing to hold up. The dollar was weaker against EUR, JPY, GBP, CHF, AUD, and NZD, but still managed to stay ahead of CAD.

The yen, on the other hand, rebounded sharply as intervention risk moved back into focus. Japanese officials, including Prime Minister Takaichi, expressed concern over yen weakness, with Takaichi stating that an undervalued yen is problematic. Economic Revitalization Minister Kiuchi also signaled that the phase of Abenomics-style reflation policy 'is over'. These comments, combined with fresh rate checks and a pullback in USD/JPY from near 160, suggest that authorities are taking steps to curb further yen weakness.

The Australian dollar was firmer against the US dollar on Friday, but still remains down heavily on the week. The key driver behind this stabilization is not a dovish RBA decision, but rather traders reducing long exposure ahead of Tuesday's meeting, where a 25bp hike to 4.60% is essentially fully priced.