BY COMFORT OGBONNA
The Japanese yen hovered near its weakest level in nearly four decades against the U.S. dollar in early Asian trading on Friday, as shifting expectations around Federal Reserve policy and persistent dollar strength kept pressure on the currency.
The yen traded flat at 161.82 per dollar, only slightly recovering from Thursday’s two-year low of 161.95. A break above 161.96 would mark the weakest level for the yen since 1986, underscoring the scale of its long-term decline against the greenback. Despite the marginal stabilization, market sentiment remains fragile, with traders closely watching both U.S. economic data and Japanese inflation trends for direction.
Fresh data from Tokyo showed that core inflation accelerated in June, matching forecasts and reinforcing expectations that Japan’s price pressures remain sticky. However, the reading did little to materially strengthen the yen, as broader global rate dynamics continue to dominate currency movements.
The dollar index, which tracks the U.S. currency against a basket of six major peers, slipped slightly on Thursday after a three-day rally that had pushed it to its highest level since May 2025. Even with that pause, the index is still on track for its first consecutive weekly gain since tensions escalated in the Middle East earlier this year, reflecting sustained investor demand for the dollar as a safe and high-yielding asset.
Market analysts say recent dollar strength has been driven largely by expectations that U.S. interest rates will remain elevated for longer than previously anticipated. However, some short-term consolidation is now emerging as traders reassess the Federal Reserve’s policy trajectory.
Analysts at Capital Economics noted that the dollar may be due for a temporary pause following its sharp post-Federal Open Market Committee rally. However, they added that diverging monetary policy paths between the United States and Europe could continue to support the dollar over the longer term, particularly into the second half of 2026.
In the United States, inflation data released on Thursday showed that cost pressures continued to build in May. The Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, rose 4.1% year-on-year, in line with expectations. The increase was partly attributed to higher energy costs linked to geopolitical tensions in the Middle East.
Federal Reserve officials delivered mixed signals following the release. Chicago Fed President Austan Goolsbee pointed to tentative signs of easing in services inflation but cautioned that underlying price pressures remain elevated and are moving in an unfavorable direction. Meanwhile, New York Fed President John Williams said inflation is likely to moderate over time but emphasized that current levels are still too high for comfort.
The mixed messaging has left markets uncertain about the timing of any potential policy shift. According to CME Group’s FedWatch tool, traders are currently pricing in a 69% probability that the Federal Reserve will keep interest rates unchanged at its next policy meeting on July 29, slightly higher than the previous day’s estimate.
In currency markets, the euro slipped 0.1% to $1.1361, while the British pound remained steady at $1.3187. Commodity-linked currencies also weakened, with the Australian dollar down 0.2% at $0.6899 and the New Zealand dollar easing 0.1% to $0.5646.
Cryptocurrencies moved modestly higher despite broader market caution. Bitcoin rose 0.7% to $59,801.31, while ether gained a similar 0.7% to $1,569.09, reflecting a mild rebound in digital asset sentiment alongside fluctuating risk appetite across global financial markets.
Overall, the currency landscape remains dominated by expectations of prolonged U.S. monetary tightening, leaving the yen under sustained pressure even as domestic inflation data and global macro signals attempt to stabilize sentiment.
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