The dollar headed for its worst week since late July on Friday (October 3rd) as the US government shutdown heightened uncertainty, while the yen weakened from this week's high as traders considered the Bank of Japan's next move ahead of this weekend's ruling party leadership election.

The dollar index, which measures the greenback against a basket of major currencies, was flat at 97.77. The euro rose 0.2% to $1.1736. The pound sterling strengthened 0.1% to $1.345.

"The government shutdown in the US is having an impact on market participants, meaning we're not getting the data we normally get, like non-farm payrolls today," said Michael Brown, senior research strategist at Pepperstone. "I think that's why we're seeing such subdued trading."

BOJ GOVERNOR CAUTIOUS

Although the ISM data is due out of the US later, Brown said he doesn't expect it to impact the market. The yen weakened 0.1% to 147.375 per dollar, after earlier falling as much as 0.4%. However, the yen remains on track for a 1.4% gain this week, which would be its biggest since mid-May.

BOJ Governor Kazuo Ueda struck a cautious tone in his comments about the global economy, lowering expectations of an imminent interest rate hike. The market is also focused on Saturday's Liberal Democratic Party general election that will determine Japan's next prime minister.

"Market participants are a little disappointed that he (Ueda) may not be as supportive of the idea of ​​an October rate hike as some of his colleagues have been in recent sessions, which is why we're seeing a little pressure on the yen," Brown said.

The market is closely monitoring speeches by BOJ officials this week after the central bank's Tankan survey on Wednesday showed confidence among large manufacturers improved for the second straight quarter.

Vice Governor Shinichi Uchida said on Thursday that business sentiment is improving and corporate profits remain strong despite US tariffs weighing on exports. However, in his speech on Friday, Governor Ueda reiterated how global factors, particularly the health of the US economy, could influence the trajectory of wages and prices in Japan.

Goldman Sachs economists said in a note that Ueda's speech "supports our view that the likelihood of an October rate hike is very low." The LDP election also has implications for the budget and policy of Japan's central bank.

Among the front-runners, dovish party veteran Sanae Takaichi could fuel further bond market uncertainty, while Agriculture Minister Shinjiro Koizumi and chief government spokesman Yoshimasa Hayashi are less likely to shake things up. (alg)

Source: Reuters