The dollar index slipped to a one-week low on Friday, as hotter-than-expected Tokyo CPI data fueled speculation of a Bank of Japan (BOJ) rate hike in December. The yen surged across the board, supported by growing expectations that Japan’s central bank may tighten monetary policy sooner than anticipated. U.S. Treasury yields continued to ease amid softening expectations for further Federal Reserve rate hikes, with lighter trading volumes due to the Thanksgiving holiday contributing to subdued market activity.

Geopolitical and Global Economic Factors Weigh on Sentiment

Geopolitical tensions, including tariff-related uncertainties, added complexity to market dynamics. In the eurozone, persistent structural challenges and cautious remarks from the European Central Bank (ECB) highlighted the region's economic fragility, while Germany’s IFO report pointed to ongoing headwinds. Meanwhile, Chinese tariff exemptions and improved consumer confidence in New Zealand provided a regional lift, with easing inflationary pressures in Europe and the U.K. bolstering sentiment for the euro and pound. U.S. Thanksgiving sales data showed resilience in consumer spending, but markets remain watchful of durable goods orders, GDP revisions, and personal consumption figures due next week.

Key Currency Movements

• Yen: The yen rallied sharply, gaining against all G10 peers as Tokyo inflation data raised expectations for a December BOJ rate hike. USD/JPY approached the 149 level, with further declines possible if BOJ tightening speculation persists.
• Euro: Rebounded from recent lows, supported by short-covering and positioning ahead of eurozone inflation data. However, structural economic challenges in the eurozone keep the outlook cautious.
• Pound: Strengthened against the dollar, testing resistance levels amid light holiday trading volumes and easing inflation expectations in the U.K.
• Australian Dollar: Rose on reduced Reserve Bank of Australia (RBA) rate cut bets and a resilient domestic labor market, although AUD/JPY gains were capped by yen strength.
• Dollar Index: Dipped as Treasury yields softened, reflecting reduced rate hike expectations and holiday-driven trading dynamics.

Market Outlook: Data and Geopolitics in Focus

• Yen: Likely to extend its gains if market speculation of BOJ tightening grows, with USD/JPY potentially breaking below 149 as momentum builds.
• Euro: Faces downside risks unless eurozone inflation data signals easing price pressures and economic stabilization.
• Pound: May see further gains if U.K. economic data surprises positively or if geopolitical risks weigh on the dollar.
• Australian Dollar: Expected to remain range-bound, with RBA caution on inflation providing a floor against significant declines.
• Dollar: Vulnerable to further losses amid thin liquidity and holiday trading, with next week’s economic data and geopolitical developments shaping its trajectory.

Conclusion

As markets digest the implications of Japan’s inflation data and BOJ rate hike speculation, the yen appears poised for further strength. The dollar remains under pressure amid softer yields and profit-taking, while the euro and pound attempt to capitalize on easing inflationary trends. Commodity-linked currencies like the Australian dollar hold steady in a cautious environment. The focus will shift to upcoming U.S. and eurozone data and geopolitical developments, which are likely to drive market sentiment in the coming week.