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Global financial markets ended the week on edge as a sharp selloff in technology stocks fueled demand for the U.S. dollar, pushing it toward its strongest weekly showing in months. At the same time, political uncertainty in Japan added fresh tension to currency and bond markets, underscoring how quickly sentiment can shift in a fragile, AI-driven economy.

From Wall Street to Tokyo, investors are reassessing risk, central bank leadership, and the economic consequences of massive artificial intelligence spending.

Dollar Finds Support Amid Global Market Turmoil

The U.S. dollar held near a two-week high on Friday, setting itself up for its best weekly performance since November. The greenback’s resilience came despite falling U.S. Treasury yields, a sign that investors were prioritizing safety over returns as equities tumbled.

A broad selloff in global stocks, led by sharp losses in technology shares, has driven capital back into the dollar, traditionally seen as a haven during periods of market stress. The shift reflects growing unease about whether the pace and scale of artificial intelligence investment can be justified by near-term returns.

The dollar index, which tracks the currency against six major peers, hovered around 97.96, close to its strongest level since late January. By week’s end, the index was on track for a gain of about 1%, its steepest rise in more than two months.

Fed Leadership Nomination Boosts Dollar Confidence

Another factor underpinning the dollar’s advance has been renewed confidence in U.S. monetary policy direction. Markets reacted positively after President Donald Trump nominated Kevin Warsh as the next chair of the Federal Reserve last week.

Warsh is widely viewed as less inclined toward aggressive interest rate cuts, easing investor concerns about potential political pressure on the central bank. That perception has helped stabilize expectations around U.S. policy, at least in the short term, and reinforced demand for the dollar.

Even as recent economic data hinted at cooling momentum in the U.S. labor market, traders appeared reassured that the Fed may not rush into easing unless conditions clearly deteriorate.

Jobs Data Raises Questions for the Fed

U.S. Treasury yields slipped during the week following data that suggested hiring may be slowing more than policymakers anticipated. Attention is now firmly on next week’s closely watched January payrolls report, which could shape expectations for interest rate moves later this year.

Economists at ING noted that signs of softer employment growth may indicate the Federal Reserve underestimated labor market risks at its January policy meeting. If upcoming data confirm substantial downward revisions to payroll figures, pressure could mount on the Fed to reconsider rate cuts.

While markets are still pricing in two reductions in borrowing costs this year, expectations for a possible move as early as June have gradually increased.

Euro and Pound Struggle to Find Footing

In Europe, the euro remained under pressure, trading around $1.178 after the European Central Bank left interest rates unchanged, as widely expected. ECB officials also downplayed the influence of currency movements on future policy decisions, signaling continuity rather than concern over the dollar’s strength.

Sterling fared worse, extending losses during Asian trading hours. The British pound slipped to about $1.352 after suffering nearly a 1% drop in the previous session.

The Bank of England held rates steady as well, but the decision was far from unanimous. A narrow 5–4 vote revealed growing divisions within the central bank, with policymakers acknowledging that borrowing costs could fall if inflation continues to cool as forecast.

Yen Steadies Ahead of High-Stakes Japan Election

The Japanese yen showed modest gains, trading near 156.7 per dollar, as investors positioned ahead of a national election scheduled for Sunday. The vote has taken on outsized importance for markets after weeks of turbulence driven by fiscal concerns.

A potential victory for Prime Minister Sanae Takaichi has raised questions about Japan’s future spending plans, including proposals to cut consumption taxes. While such measures could stimulate growth, they have also reignited worries about the country’s already heavy government debt burden.

Currency strategists warn that a decisive electoral mandate could reduce short-term political constraints on fiscal expansion, potentially unsettling bond markets and weighing on the yen if funding plans remain unclear.

Risk Aversion Spills Into Commodities

The wave of risk aversion has not been limited to currencies and equities. Precious metals markets experienced sharp swings, amplified by leveraged trades and speculative positioning.

Silver prices fell around 3% in early trading on Friday and were on course for an eye-catching weekly decline of roughly 18%. Gold also faced heavy selling pressure, reflecting how quickly investors have moved to unwind crowded positions amid broader market volatility.

These moves underscore the fragile balance between inflation hedging, speculative demand, and the need for liquidity during periods of stress.

Crypto Markets Remain Volatile

Digital assets were equally unsettled. Bitcoin traded erratically after falling to its lowest level since October 2024 earlier in the week. The cryptocurrency last changed hands near $63,300, recovering slightly from a session low around $60,000.

The choppy price action reflects broader uncertainty across risk assets, as traders reassess valuations in an environment marked by tighter financial conditions and shifting expectations around interest rates.

What Comes Next for Global Markets

Looking ahead, investors face a packed calendar that could redefine market direction. Key U.S. employment data, central bank commentary, and the outcome of Japan’s election all have the potential to move currencies sharply.

For now, the dollar’s strength highlights a familiar pattern: when uncertainty rises, whether from AI-driven stock volatility, political risk, or economic data surprises global capital often seeks shelter in the world’s dominant reserve currency.

Still, much depends on whether upcoming data validate fears of slowing growth or reassure markets that the global economy can absorb rapid technological change without major disruption.

A Market Searching for Stability

This week’s moves offer a clear reminder that markets remain highly sensitive to both policy signals and structural shifts like artificial intelligence investment. As investors weigh opportunity against risk, the tug-of-war between growth optimism and caution is likely to intensify.

Whether the dollar can extend its rally, the yen can avoid renewed pressure, or risk assets can regain confidence will depend on how policymakers and data shape the narrative in the weeks ahead.

(With inputs from Reuters.)

 

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