Yen set for biggest rally in a month; risk-averse investors shun dollar 

By Reuters News

By Amanda Cooper

- The yen headed for its strongest daily rally in a month on Thursday, drawing safe-haven flows from investors fretting over fragile equity markets, high crude prices, war in the Middle East and potential disappointment in future returns from AI.

The dollar often serves as the market's safe haven of choice when sentiment takes a knock, but with Treasury yields also falling thanks to capital flows into bonds, and investors unwinding some of their bets on future US rate rises, the US currency slipped back.

The yen, which has spent much of October in a tight range, strengthened sharply, leaving the dollar down 0.6% at 157.27 , set for its largest drop since late September. The yen pushed higher against the euro , pound and Australian dollar .

"AI is making people nervous, as is oil ... and as is France, and obviously we have a slight degree of risk aversion in the market, which is benefiting Treasuries, marginally benefiting gilts, and obviously did so for JGBs overnight," Chris Scicluna, head of economic research at Daiwa Capital Markets, said of the move lower in government bond yields in the US, UK and Japan.

"Expectations with regard to the Bank of Japan's policy outlook are coalescing and some of the upside risks that were there in terms of Japanese monetary policy probably diminished in part because of concerns about the AI build-out and France as well. Clearly, the yen has made a move to strengthen this morning," he added.

The BOJ is expected to leave rates unchanged at 1.25% at its meeting next week and markets show traders expect a steady series of increases that would bring borrowing rates to around 2% by the end of 2027.

Worries about France's ability to tackle its huge debt burden have hurt French government bonds and raised concern about other heavily indebted euro zone countries, which has, in turn, weighed on the euro.

The single currency seems to have found a floor, for now, after a month on the slide as a favoured channel for putting a bet on a stronger dollar when fiscal concerns in France and Europe's energy fragility attracted short sellers.

French 10-year yields are trading around their highest since 2002, as weekend unrest across France, fuelled in part by cuts to public services, has highlighted how politically difficult it will be to bring budget deficits under control.

The euro was last steady against the dollar at $1.1234 and against the pound at 83.8 pence .

"The euro cannot sell off and it cannot rally," Spectra Markets' president Brent Donnelly said. "We are in a stalemate where the overhang of bad news just about perfectly offsets the market positioning."

The European Central Bank is expected to hold its benchmark rate at 2.5% next week, though a hike is all but priced in before the year's end.

Investors hold a near-record bullish position in the dollar, according to LSEG data, on the assumption the AI boom keeps the US economy humming and strong growth supports US interest rates staying higher for longer .

Recent wobbles in AI-related debts and stocks have knocked that confidence a little bit and unsettled the dollar, which has fallen for two weeks in a row against a basket of currencies .

Sterling , which hit a one-month high of $1.3409 earlier in the week, has been supported by hotter-than-expected British inflation and held at $1.3403. GBP/

The Federal Reserve is seen on hold in October, with the Fed funds rate window at 3.75-4%, but hiking in December.

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