FOREX-Dollar retreats from two-week high, yen set for weekly loss

By Laura Matthews and Amanda Cooper

NEW YORK/LONDON, Feb 6 (Reuters) - The dollar fell from two-week highs on Friday, giving up some of its safe-haven gains as risk assets rebounded from a deep rout driven by concerns over a surge in AI-related spending this year.

Still, the buck remained on track for a weekly gain, and pared some earlier losses against the Japanese yen, after U.S. data showed improving consumer sentiment this month, even as concerns about the labor market and rising costs of living linger.

The yen remains on track for its worst weekly performance against the dollar since October and has given up most of January's hefty gains, as traders brace for Sunday's national election.

"The dollar has largely moved inversely to risk assets this week, including equities and bitcoin, as well as precious metals such as gold and silver," said Uto Shinohara, senior investment strategist, Mesirow Currency Management, Chicago. "Today’s reversal in the dollar has coincided with a reversal in those assets."

Global shares have seen their biggest weekly selloff since November .MIWD00000PUS, as investors fret about the massive spending on artificial intelligence as well as the cascading impact of fast-advancing AI tools that could upend various sectors.

The dollar index, which tracks the performance of the U.S. currency against six others =USD, was down 0.3% after earlier hitting a two-week peak. It was still up 0.52% on the week, on pace for its largest weekly rise since early January.

The catalyst for this week's gain was President Donald Trump's nomination last Friday of Kevin Warsh, who is not seen as a big advocate of steep rate cuts, as the next Federal Reserve Chair.

Charu Chanana, chief investment strategist at Saxo, said investors were suddenly pricing three shocks at once.

"Big Tech capex scrutiny, AI disruption risk in software beyond productivity hype, and a silver-driven liquidity/margin flush. This looks like a positioning flush where the same crowded exposures are being de-risked across assets."

Next up for currency traders is the delayed release of the U.S. payrolls report for January, which lands next week. Various measures of labour market strength this week have suggested the world's largest economy is losing some momentum and traders are now pricing in a higher chance that interest rates will be cut within the first half of this year, rather than in the second.

"Major downward revisions to payrolls next week would add to the pressure to eventually resume rate cuts," ING economists said in a note.

YEN FINDS FOOTING AHEAD OF ELECTION

The yen JPY= was little changed at 156.98 per dollar ahead of Sunday's vote where a victory for Prime Minister Sanae Takaichi could be on the cards.

The vote has investors on edge because fiscal worries have sparked a stomach-churning selloff in the currency and bond markets, and a further leg lower would likely reverberate globally.

"Since the news was bad in a three-day streak of market selloff, Friday is closing out the week with excitement over the Japanese election that could translate into long-term deterioration for the yen," said Juan Perez, director of trading, Monex USA in Washington.

The euro EUR= was up 0.32% at $1.1813 after the European Central Bank left interest rates unchanged as expected on Thursday and played down the effect of currency fluctuations on its future decisions.

Sterling GBP= recouped some of Thursday's near 1% slide and was up 0.61% at $1.3608 and was headed for its worst weekly drop against the greenback since October 27.

The Bank of England also kept rates on hold on Thursday in an unexpectedly narrow vote and said borrowing costs are likely to fall if an expected drop soon in inflation is sustained.

In the crypto market, bitcoin BTC= rose 8.70% to $68,613.05 after hitting its lowest since October 2024 at $60,017. It was still set for a decline of 9% for the week.