Yen Rises for Second Week as Dollar, Euro Await US Inflation Data

The U.S. dollar and the euro were largely unchanged in Friday trading as foreign exchange markets awaited a key U.S. inflation report, while the Japanese yen extended its gains to a second consecutive week on mounting expectations for a central bank rate hike.

Dollar and Euro in Holding Pattern

The U.S. Dollar Index, which measures the greenback against a basket of six major currencies, traded flat near 99.06 and was on track to end the week with little change. Currency traders refrained from making significant directional bets ahead of the August Consumer Price Index (CPI) release, a critical report that will heavily influence the Federal Reserve's upcoming interest rate decision.

"The focus on tonight’s US inflation numbers is now much greater after another spike in oil prices and government bond yields," said Russ Mould, investment director at AJ Bell, in a note. He added that a temporary stabilization in crude and yields contributed to a calmer market open on Friday.

The euro also traded sideways, hovering around $1.1609, as investors continued to digest the European Central Bank's decision on Thursday to raise its benchmark rate by 25 basis points to 2.50%.

Yen Outperforms on Rate Hike Speculation

The Japanese yen was the standout performer among G10 currencies, strengthening 0.14% against the dollar to 154.18. The currency posted a weekly gain of 1.2%, marking its second consecutive week of advances and its longest winning streak since May.

The yen's strength is fueled by growing speculation that Bank of Japan (BOJ) Governor Kazuo Ueda and the policy board will raise interest rates at their Sept. 17-18 meeting. This view was bolstered by data showing Japan’s corporate goods price index (CGPI) rose 7.6% year-over-year in August, above the 7.4% forecast, signaling that rising import costs are feeding into domestic inflation.

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Financial markets are now pricing in a high probability of a 25-basis-point rate hike by the BOJ next week. However, analysts at DBS noted that market focus will be on whether policymakers signal a flexible, data-driven approach rather than a commitment to a rapid series of hikes.

Fed Expectations and Yields Underpin Greenback

While the dollar was flat on Friday, it remains supported by rising U.S. Treasury yields and hawkish monetary policy expectations. A higher-than-expected U.S. Producer Price Index (PPI) report on Thursday, which showed an acceleration to 5.4% annually, reinforced bets on further Fed tightening.

Key market indicators include:

• The probability of a 25-basis-point Fed rate hike in September has climbed to 71.3%, up from 61.2% earlier in the week, according to the CME FedWatch Tool.
• The 10-year U.S. Treasury yield is trading near 4.97%, approaching the key psychological level of 5.0%.

Elevated energy prices, with Brent crude trading around $109 a barrel amid Middle East tensions, continue to stoke global stagflation fears, complicating policy decisions for central bankers in Washington, Frankfurt, and Tokyo.