Euro set for weekly drop, yen eyes biggest gain since early September

By Stefano Rebaudo and Li Gu

Oct 23 (Reuters) - The euro headed for a moderate weekly loss as France's sovereign risk premium resumed its climb, while the yen was on track for its biggest rise since early September after attracting safe-haven demand amid a sell-off in AI-related stocks.

A recent tech-led market sell-off showed the dollar no longer benefiting from safe-haven flows, as doubts about the AI investment boom fuelled expectations of a more dovish Federal reserve.

The yield on the benchmark US 10-year Treasury note was up 2.5 basis points at 4.98% on Friday after falling 19.5 bps the day before, as concerns about the sustainability of the AI outlook reignited.

The Japanese currency jumped on Thursday as investors sought safety amid fragile equity markets and concerns about France's fiscal trajectory and possible new street riots there, after being roughly unchanged earlier in the week.

The dollar rose 0.15% to 157.00 yen . It climbed 2.15% to 156.88 in the week ending on September 21, when the Fed hiked rates, signalling it was ready to act to tame inflation.

The single currency was about to end the week with a modest drop although a sharp sell-off in French government bonds brought the country's risk premium to levels last seen during the euro zone sovereign crisis in 2011.

Strategists said both the euro and the dollar faced selling pressure this week, leaving the currency pair marginally in the dollar's favour.

"My suspicion is that euro/dollar is currently like a deer caught in the headlights, frozen in place as it waits for next week’s central bank meetings," Volkmar Baur, forex strategist at Commerzbank, said.

The European Central Bank is expected to stay on hold on Thursday but investors will scrutinize any hint about the rate outlook after President Christine Lagarde said in late September a moderate policy response to inflation was appropriate.

Data showed on Friday that French business activity unexpectedly contracted in October weighed on the single currency.

The euro was last down 0.15% at $1.1200 and set to end the week 0.42% lower.

It fell more sharply against the yen, touching its lowest level since October 2025 at 175.25 yen on Friday . It was last down 0.05% at 175.75 yen, and on track for a weekly decline of 1.0%.

"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.

The single currency was set to decline 0.55% versus the Swiss Franc.

The dollar index , which measures the greenback against a basket of currencies, rose 0.20% to 101.80, after touching its lowest level since the beginning of the month at 101.44 on Thursday. It was on track for a 0.05% weekly rise.

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 from the BoJ 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 to announce policy decisions next week.