Market News

By Kevin Buckland

TOKYO (Reuters) -The yen softened on Friday heading into Sunday's upper house election in which Japan's ruling party looks vulnerable, while, more broadly, the U.S. dollar was set for a second straight weekly gain against major peers, helped by solid economic data.

The dollar rose 0.14% against the yen on Friday at 148.81, heading for a weekly rise of nearly 1% on the Japanese currency, more than its gains against the euro, pound or Swiss franc.

Part of the reason for the weakness is Sunday's election. Polls suggest Japan's ruling coalition is at risk of losing its majority - a development that would stir policy uncertainty at home and complicate tariff negotiations with the U.S.

"A lurch through the 150-level (yen per dollar) is likely if the government loses its majority," said Derek Halpenny, head of research, global markets EMEA at MUFG, and that moves on Monday could be exacerbated by thin liquidity because of a holiday in Japan.

"With most other parties calling for further support for households, speculation of additional fiscal spending will likely see further rises in (Japanese government bond) yields and additional yen selling," Halpenny said.

U.S. tariffs are adding pressure to the yen, as Japan, which initially was touted by the White House as likely to be among the first to reach a trade deal, has been deadlocked with Washington over politically sensitive issues of car and agriculture tariffs.

Japan's top trade negotiator, Ryosei Akazawa, held talks with U.S. Commerce Secretary Howard Lutnick on Thursday, as Tokyo races to avert a damaging 25% levy after an August 1 deadline.

DOLLAR STRENGTH

Elsewhere, the euro was up 0.23% on the dollar at $1.1624 and the pound was up marginally at $1.343 though both are set for weekly declines as strong U.S. economic data causes traders to pare back their expectations for Federal Reserve rate cuts in the near term.

As a result, the dollar index, which tracks the currency against six main peers, was last 98.487, up 0.6% on the week, building on the previous week's 0.91% rally.

U.S. data Thursday showed retail sales rebounded more than expected in June and first-time applications for unemployment benefits dropped to a three-month low last week.

That, in combination with data earlier in the week showing U.S. consumer prices increased by the most in five months in June, has shifted Fed expectations.

Traders currently price about 45 basis points of U.S. rate cuts for the remainder of the year, down from closer to 50 basis points at the start of the week.

Clouds of uncertainty still hang over the dollar though, which has been shaken in recent days and weeks by fiscal worries from Trump's massive spending and tax-cut bill, as well as the U.S. President Donald Trump's relentless criticism of Fed Chair Jerome Powell for not cutting rates.

The dollar index remains 9.15% lower over the course of this year, following a steep selloff in March and April when Trump's erratic trade policies undermined confidence in U.S. assets, sending the currency, Treasury bonds and Wall Street stocks all lower.

Elsewhere, the Swiss franc was a fraction firmer on the dollar at 0.8026 francs while Bitcoin hovered just above $120,000.

The world's biggest cryptocurrency pushed to an all-time peak of $123,153.22 this week, with the U.S. Congress passing a bill to create the framework for dollar-pegged stablecoins.

(Reporting by Kevin Buckland; Editing by Shri Navaratnam, Jamie Freed and Rachna Uppal)