Yen Jumps on Inflation, Dollar Extends Losses on Trump Uncertainty

The Japanese yen surged to a 2.5-month high on Friday following a surge in Japanese inflation. Meanwhile, the US dollar is poised for a third consecutive weekly decline as traders assess the lack of progress on trade policy during Donald Trump's second term.

The yen breached technical resistance at 150 per dollar on Thursday and extended gains to 149.285 on Friday after Japan reported its fastest core inflation rate in 19 months.

The euro gained 0.8% overnight and traded steady at $1.0498 in Asia, with traders anticipating the German elections over the weekend.

The dollar faced widespread losses as bullish traders who had accumulated significant long positions in anticipation of a trade war have retreated amidst Trump's lack of action on tariffs. Trump has imposed a 10% tariff on Chinese goods but has suspended threatened tariffs on Canada and Mexico, leaving many others as mere threats.

"Positioning was very one-sided and very heavy in longs," said Jason Wong, strategist at BNZ. "Some of those longs are becoming impatient as the only action taken is a 10% tariff on China."

Higher-than-expected Japanese inflation (3.2% vs. forecast 3.1%) supports the case for higher Japanese interest rates, which could bolster the yen.

The yen has gained 3.6% against the dollar so far this month. Japanese bond yields rose on Friday as the market priced in a 25-basis-point rate hike by September.

Trump's comments about a possible trade deal with China boosted the trade-sensitive Australian and New Zealand dollars. However, statements from Treasury Secretary Scott Bessent indicating no plans to increase long-dated debt sales exerted downward pressure on yields and the dollar.

The dollar index fell to its lowest level of the year (106.29) and traded at 106.45. The Aussie and kiwi are trading at their highest levels in 2021 despite recent rate cuts.

"Australia is in a position where there could be some more decreases in interest rates, but policymakers have to be cautious," said the country's central bank governor on Friday.

The kiwi traded at $0.5772, while the Aussie surpassed the 64-cent mark for the first time this year.

Trump announced a planned visit by Chinese President Xi Jinping to the US, lifting the yuan to a one-month high. Sterling reached $1.2674, its highest since mid-December.

Purchasing manager index indicators are expected to be released globally later on Friday.