Yen set for weekly gain as AI jitters spur safe-haven rush

SHANGHAI/SINGAPORE, Oct 23 (Reuters) - The Japanese yen was set for its biggest weekly gain since early September, buoyed by safe-haven flows as risk-aversion took hold in the broader markets that pushed US Treasury yields sharply lower and left the dollar hugging a three-week trough.

The moves in the currency markets were driven by doubts over the AI spending boom even as Brent crude futures stay above $110 per barrel, suggesting concerns over economic growth outweighed inflation worries.

The yen firmed as much as 0.4% on Friday to 156.08 per dollar, its strongest level in more than a month, before reversing the gains to 156.89 by midday. It was set for a 0.7% gain for the week.

"The yen was bought as a hedge, not as an allocation," said Shoki Omori, chief fixed income ⁠strategist for Japan at Deutsche Bank.

"But we see no evidence of Japanese institutions repatriating, and the carry against the dollar is intact," he said, adding that the bank expects USD/JPY to trade in a 155-159 range into the Bank of Japan's policy meeting.

Data on Friday showed Japan's annual core consumer inflation exceeded the central bank's 2% target in September for the first time in nine months, a sign of broadening price pressure that bolsters the case for a near-term rate hike.

The majority of economists polled by Reuters expect a hold on Friday of next week, followed by a quarter-point hike at the following meeting in December.

Beyond the BOJ meeting, investors are also bracing for the Federal Reserve and the European Central Bank to announce policy decisions next week. Both are also expected to keep interest rates on hold for October.

AI WORRIES

The dollar index , which measures the greenback against a basket of currencies, edged up at 101.64, after touching its lowest level since the beginning of the month at 101.44 on Thursday.

US 10-year Treasury yields hovered near a one-month low at 4.9674%, after tumbling on Thursday when equities sold off on renewed concerns about the sustainability of the AI boom, burnishing the safe-haven appeal of sovereign debt.

The benchmark yield breached the psychologically important 5% last month and has mostly stayed above that level until this week, and the big move lower in yields has helped pull back rate hike bets for next year.

"Whether yields stay below 5% is another question," said ING analysts said, adding they still expect the 10-year yield to snap back above 5% eventually, given inflation, fiscal deficit and AI trends.

"The risk-off environment takes pressure off the Fed to hike next week. But even given that, we'd not be loading up on duration here, at least not just yet," the analysts said.

Brent futures pushed above $114 per barrel, extending a 4% climb from the previous session after Houthi attacks in Saudi Arabia stoked concerns of further disruption to energy supplies from the region.

RISING DEMAND FOR SAFETY

While demand for safety is intensifying, the beneficiaries differ depending on the risk, OCBC analysts said.

AI jitters favour the yen, Middle East tensions support the Canadian dollar and Norwegian crown due to rising oil prices, while French fiscal stress benefits the Swiss franc, they said, adding that AI had become an increasingly two-way macro risk for the US dollar.

The Canadian dollar firmed past C$1.40 against the greenback, to its strongest level in a month. The Swiss franc was steady at 0.8211 per dollar, near its firmest level in a month.

China's offshore yuan was little changed at 6.6729 per dollar, hovering near its strongest level in more than four years. The euro was largely flat at $1.121.

Worries about France's ability to tackle its huge debt burden have hurt French government bonds and raised concern about other heavily indebted euro-area countries, weighing on the euro.

The Australian dollar held steady at $0.7015, while the Kiwi dollar rose 0.2% to $0.5695. AUD/