The yen posted its biggest daily gain in nearly a year on Thursday, after Japanese policymakers gave a relatively clear signal of policy change, while the euro headed for its biggest weekly decline since May.
The US dollar index edged lower ahead of Friday's non-farm payrolls report, mainly weighed down by the yen which strengthened nearly 2% to a three-month high.
Bank of Japan Governor Kazuo Ueda said on Thursday that the central bank had some options on interest rates after pulling short-term borrowing costs out of negative territory. Markets took this as a sign that change might be coming and boosted the yen.
The BOJ has been the only central bank to maintain ultra-low rate policy, pushing the yen to a decade-low against the US dollar and fueling speculation that monetary policymakers may intervene to prop up the currency.
Expectations are rising for the BOJ to signal that it will soon end this policy and next week's meeting will be the focus of markets.
The euro hovered around three-week lows, following a reassessment of interest rate expectations for 2024, although markets took a cautious stance ahead of Friday's US non-farm payrolls report.
Declining economic volatility, a slowdown in major economies such as Germany, and weakness in the labor market have prompted traders to assume rates will drop to 3.0%, from 4% currently, by September 2024, from an expected 3.4% just two weeks ago.
The European Central Bank will hold its last meeting for 2023 next Thursday. There hasn't been much opposition from policymakers to recent rate revaluations, with hawkish policymakers like Isabel Schnabel also calling for rate cuts.
Separate US jobs data this week showed that the labor market was slowing, but did not indicate material weakness. Futures markets peg the chance of a rate cut at 60% by March, up from 50% a week ago, according to CME's FedWatch tool. But analysts think this may be too much.
