The dollar was set to cap the week on a strong note on Friday as it was perched near a two-year high bolstered by a hawkish US rate outlook, while the yen struggled to stay afloat as it again weakened to a new low.
Currencies took a breather after huge moves in the previous session sparked by a broad rally in the greenback. That drove its peers to milestone lows with the South Korean won sinking to a 15-year trough, the Canadian dollar tumbling to its weakest in more than four years and the Australian and New Zealand dollars hitting two-year lows.
Central banks from Brazil to Indonesia also scrambled to defend their struggling currencies on Thursday.
Moves in the early Asian session on Friday were more subdued, though that did not stop the yen from weakening to a five-month low of 157.93 per dollar, as it continues to remain under pressure from the Bank of Japan's (BOJ) reluctance to further raise rates.
The BOJ kept interest rates unchanged on Thursday and its governor stayed vague on how soon it could push up borrowing costs, just a day after the Federal Reserve pointed to fewer US rate cuts next year.
Some investors had expected the hawkish tilt from the Fed to give the BOJ some leeway to raise rates, or at least hint at an imminent hike in January, but the central bank ultimately offered few clues.
"Based on the comments from Governor (Kazuo) Ueda yesterday, I think the BOJ will likely hike interest rates a bit more slowly in the coming year," said Carol Kong, a currency strategist at Commonwealth Bank of Australia. "The base case is now for March as the next hike, but I wouldn't rule out January."
"The direction of travel is definitely up for dollar/yen," she said.
Data on Friday showed Japan's core inflation accelerated in November as rising food and fuel costs hit households.
Sterling also slipped to a one-month low of $1.2490 early in the session.
Bank of England (BoE) policymakers voted 6-3 to keep interest rates on hold on Thursday, a bigger split than economists had predicted as officials disagreed over how to respond to a slowing economy that remains beset by inflation pressures.
The outcome was interpreted as more dovish than expected by markets, with traders now pricing in about 53 basis points of rate cuts for 2025, up from around 46 bps before.
Dollar dominance
The greenback stayed on the front foot and attempted to notch a fresh two-year peak against a basket of currencies, with the dollar index last up 0.02% at 108.45.
It was set to end the week with a 1.4% gain, underpinned by expectations that US rates will stay higher for longer. Markets are now pricing in less than 40 bps worth of cuts for 2025.
Focus is now on the release of the core PCE price data - the Fed's preferred measure of inflation - later on Friday, for further clues on the outlook for the US economy.
"With the Fed injecting some concern of right tail inflation risk into the mix, the outcome of the U.S. core PCE print does have the potential to impact the USD and equity sentiment," said Chris Weston, head of research at Pepperstone.
The euro last bought $1.03635 and was eyeing a weekly drop of 1.3% on the back of the dollar's strength.
Similarly, sterling was headed for a 0.96% weekly decline, while the yen was set to lose more than 2.5% for the week, its worst performance since September.
The Australian and New Zealand dollars were also struggling to stay off two-year lows on Friday, with the Aussie last down 0.23% at $0.6223.
The kiwi slid 0.28% to $0.5616. Both Antipodean currencies were on track for a weekly fall of more than 2%.
