Dollar flat after inflation data, yen set for strongest weekly gain in 15 months

Market moves remain muted as investors react cautiously to fresh data

The US dollar was mostly flat against peer currencies on Friday after data showed a less-than-expected increase in inflation in January, suggesting the Federal Reserve could continue to hold rates steady in the near term.

The Japanese yen was set for its strongest weekly gain in about 15 months.

US Labor Department data on Friday showed that the consumer price index rose 0.2 percent last month compared with an estimate of 0.3 percent from economists polled by Reuters.

The euro EUR= was 0.02 percent higher at $1.1873 against the dollar, but was set to gain 0.5 percent this week. Against the Swiss franc CHF=, the dollar weakened 0.22 percent to 0.76785 and was on course for a weekly loss of 1 percent.

The dollar's behavior reflects market positioning as it awaits fresh central bank signals on the direction of interest rates, said Olivier Bellemare, senior derivatives trader at Monex Canada in Montreal.

MARKET REACTION IS 'TIMID'

Earlier this week, data suggested the US labor market was stabilizing with a drop in the US unemployment rate amid strong jobs growth in January and a less-than-expected decrease in the number of Americans filing new applications for unemployment.

"The market reaction to the data was timid at best and the moves were mostly tactical," Bellemare said.

The dollar index =USD edged lower by 0.07 percent to 96.85, on track to shed 0.84 percent for the week.

The dollar's relative weakness is partly driven by volatile US policymaking in January, recent software sector selloff that has reduced US equity market outperformance, and "idiosyncratic" developments in Asia, especially a steadily strengthening Chinese yuan, said Goldman Sachs analysts including Alexandra Kanter in an investor note.

YEN'S STRONG PERFORMANCE

The yen JPY= has dominated activity in the foreign exchange market this week, after Japanese Prime Minister Sanae Takaichi's historic election win allayed some investor worries about the government's finances.

The yen was still headed for a gain of nearly 3 percent for the week, its largest rise since November 2024, and was up 0.08 percent on the day at 152.67.

The yen was up 0.02 percent against the euro EURJPY= at 181.29 and was headed for a 2.37 percent weekly jump against the single currency, its strongest performance in a year.

"Over the longer term, yen weakening risks remain firmly in place," said Bank of America Global Research analysts led by Claudio Piron in an investor note. "But in the near term, the combination of potential intervention and scope for the market to further price-in Bank of Japan hikes at the March and April meetings skews the risk reward for USD/JPY to the downside."

The Australian dollar AUD=, the top-performing major currency of 2026 so far after soaring in recent weeks on a hawkish Reserve Bank of Australia, was down 0.20 percent at $0.70765, but still headed for a nearly 1 percent gain this week.

The Canadian dollar CAD= strengthened 0.10 percent versus the greenback to C$1.361 per dollar, still set to drop 0.45 percent for the week.