The dollar index retreated slightly on Friday but remained near its weekly highs after a rally driven by weakness in the yen and euro.
The greenback is set to post a strong weekly gain as political uncertainty in Europe and expectations of continued monetary accommodation in Japan fuelled flows out of the respective currencies.
The yen is heading for a 3.5% weekly drop following Sanae Takaichi’s leadership victory, which reinforced prospects of higher fiscal spending and loose monetary policy. Meanwhile, the euro has fallen about 1.3% this week amid France’s political turmoil.
In the US, the government shutdown continued, delaying key economic data and complicating the Federal Reserve’s policy outlook. Investors now turn to the preliminary University of Michigan Consumer Sentiment Index, expected to fall to 54.2, the weakest since May. If confirmed, it could drag the currency and yields down.
Meanwhile, New York Fed President John Williams said he would be comfortable with additional rate cuts to safeguard growth, despite internal concerns about inflation persistence. As a result, treasury yields eased slightly.
