The euro and the yen posted slight gains against the U.S. dollar on Friday but remained on course for significant weekly losses, as traders assessed mounting political uncertainty in France and reduced expectations of a near-term rate hike in Japan.

At 05:27 ET (09:27 GMT), the euro edged up to $1.1571, recovering marginally after a bruising week. Even with Friday’s uptick, the single currency is still set for its biggest weekly decline in almost a year.

The political landscape in France has intensified after President Emmanuel Macron set a deadline to appoint his sixth Prime Minister in under two years, following the collapse of the government led by Sébastien Lecornu.

François Villeroy de Galhau, Governor of Banque de France, warned that the crisis could shave at least 0.2 percentage points off GDP and dent both consumer and business confidence. “Markets will be keeping close tabs on the situation,” he said on French radio.

Yen steadies on stronger inflation figures and intervention signals

The yen strengthened modestly, with USD/JPY falling 0.3% from an eight-month high. Better-than-expected producer price data for September pointed to a pickup in underlying inflation, fueling speculation about the Bank of Japan’s next move.

Although the central bank has signaled rate hikes would follow price gains, the government is expected to resist any abrupt policy tightening — particularly as Sanae Takaichi, known for her fiscal dovishness, is poised to take office as Prime Minister.

Her anticipated leadership of the Liberal Democratic Party (Japan) has already sent the yen tumbling this week, with the currency down nearly 4% — its sharpest weekly drop since October 2024.

The weakness has prompted speculation of possible currency intervention. Finance Minister Katsunobu Katō fueled those expectations by expressing concern about “one-sided, rapid moves” in the exchange rate.

Dollar benefits from euro, yen weakness

With both the euro and yen under pressure and markets debating the extent of upcoming rate cuts by the Federal Reserve System, the dollar is heading for its best weekly performance in a year. The U.S. Dollar Index slipped 0.2% to 99.34 but remained near two-month highs.

“Markets are quite clearly rethinking popular short-USD trades, but further gains may prove harder to sustain unless markets start to price out Fed easing,” analysts at ING Group wrote.

“The dollar can consolidate some gains today, but remains at risk of corrections in our view, and another rally would start to bring the greenback dangerously far from what short-term rate differentials justify.”

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