Yen steady before BOJ, AI jitters drive Treasury rally, weigh on dollar

The yen was steady on Friday ahead of the Bank of Japan's policy decision, while the dollar tracked Treasury yields lower as a fresh wave of selling in AI shares triggered a flight to safety.

The BOJ is set to keep interest rates on hold at 1.25% in a widely anticipated move despite elevated inflation pressures , with a hawkish tone expected and markets pricing in about an 80% chance of a December hike.

The yen weakened a touch on the day to around 157.815 per dollar and was on track for a 0.2% decline this month against the dollar.

The BOJ will wrap up a packed week of central bank decisions, with the European Central Bank, the US Federal Reserve and the Reserve Bank of New Zealand all leaving interest rates unchanged as they bide their time amid stubborn inflation and tightening financial conditions.

But they are by no means done, with energy prices near multi-month highs and no resolution to the conflict in the Middle East in sight. The Bank of England and the Reserve Bank of Australia will be in focus next week, with investors watching their decisions.

"I think this is just a temporary pause. The global tightening cycle is still going to continue and that will continue to be a driver for FX markets," said Khoon Goh, head of Asia research at ANZ.

"The big question is as we enter 2027, whether or not we might end up with potentially even more hikes if the inflation stays elevated."

The euro was last flat at $1.1185 against the greenback after briefly dipping to its lowest since May 2025 in the previous session, and was on track for a 1.2% monthly drop.

Sterling strengthened 0.1% to $1.3390, and was up 1% for the month.

The Australian dollar was little changed at $0.7030 and was up 1.2% for October. The kiwi weakened slightly to $0.5626 and was flat for the month.

The dollar index, which measures the US currency against a basket of peers, was a shade weaker at 101.77. It was set for a 0.3% gain this month, marking a second straight monthly rise.

The greenback is largely weighed by a dip in US Treasury yields as the safe-haven assets attract new bids. Results from Alphabet earlier in the week rekindled worries about AI spending and pushed broader stock markets lower, triggering a selloff in equities and making safe-haven bonds more attractive.

The yield on the benchmark US 10-year Treasury note was last 4.8958% and that on the 30-year bond fell to 5.2623%, both at their lowest in over a month.

"The market reaction looked different from a conventional energy-driven risk-off episode," Sim Moh Siong, FX strategist at OCBC said in a note.

"Rather than supporting the USD and pushing US yields higher, US-centric AI concerns were accompanied by lower Treasury yields and a softer or broadly subdued USD."

Elsewhere, oil prices remained elevated, with Brent crude futures on track for an 11.5% gain in their fourth straight month of gains, the longest streak in over two years.