The euro retreated in European trading on Friday against a basket of global currencies, resuming its losses versus the US dollar and moving away from a five-year high, amid renewed corrective moves and profit-taking, and under pressure from warnings issued by European monetary authorities over the euro’s excessive appreciation.

The euro’s rise above the $1.20 level earlier this week raised concerns among policymakers at the European Central Bank, who warned that a rapid strengthening of the currency could generate deflationary effects.

Despite the current pullback, the single European currency is on track to post its third consecutive monthly gain, supported by a broad selloff in US assets and following the historic trade agreement between the European Union and India.

Price Overview

• Euro exchange rate today: The euro fell against the dollar by 0.65% to $1.1865, from an opening level of $1.1971, after touching an intraday high of $1.1975.

• The euro ended Thursday up 0.15% against the dollar, after losing 0.7% the previous day amid corrective moves and profit-taking from a five-year high at $1.2082.

European Monetary Authorities

The euro’s move above the $1.20 threshold for the first time in five years has raised concerns among European monetary authorities, prompting ECB policymakers to issue a series of cautionary statements regarding the impact of a strong currency on inflation dynamics and economic growth.

Economists noted that euro strength could amplify the deflationary impact of strong Chinese exports, potentially pushing the ECB out of its “comfort zone” and forcing it toward further interest rate cuts.

Jeff Yu, EMEA macro strategist at Bank of New York, said that while the euro-dollar exchange rate last year remained well above the ECB’s baseline scenario without triggering strong deflationary risks, trade-related uncertainty remains elevated.

Ray Attrill, head of FX strategy at National Australia Bank, said he believes ECB remarks are independent, but noted that the $1.20 level appears to have acted as a clear trigger point.

Attrill added that the euro–dollar move, which until recently had not appeared particularly strong, arguably masks broader strength in the euro, which in turn feeds back into the ECB’s inflation outlook.

Monthly Performance

Over January trading, which officially concludes at today’s settlement, the single European currency is up more than 1.5% against the US dollar, putting it on course for a third straight monthly gain.

European Interest Rates

• ECB Executive Board member Isabel Schnabel said on Wednesday that monetary policy is “in a good place,” and that interest rates are expected to remain at current levels for an extended period, with financial markets pricing stability through early 2027.

• Money market pricing for a 25-basis-point rate cut by the ECB in February currently remains below 25%.

• Investors are awaiting further economic data from the euro area, particularly on inflation, unemployment, and wages, to reassess these expectations.

European Economy

Following the trade agreement with India, markets have grown more optimistic about the outlook for the European economy, as the strategic partnership helps diversify supply chains and expand the services sector’s footprint in a vast consumer market. This supports more sustainable European growth and reduces vulnerability to global trade disputes.

The European Union and India reached a historic trade agreement this week after nearly 20 years of negotiations, a deal described by European Commission President Ursula von der Leyen as the “mother of all deals.”

The Japanese yen retreated in Asian trading on Friday against a basket of major and secondary currencies, moving into negative territory versus the US dollar and pulling away from a three-month high, amid renewed corrective moves and profit-taking, following weaker-than-expected inflation data from Tokyo.

The data showed easing inflationary pressures on policymakers at the Bank of Japan, which led to a decline in expectations for a Japanese interest rate hike in March. Despite the current pullback, the yen remains on track to record its first monthly gain since last August, supported by growing speculation over coordinated intervention by US and Japanese monetary authorities in the foreign exchange market.

Price Overview

• Japanese yen today: The dollar rose against the yen by 0.6% to 153.99, from an opening level of 153.08, while the session low was recorded at 152.86.

• The yen ended Thursday up 0.2% against the dollar, after losing 0.8% the previous day amid corrective moves and profit-taking from a three-month high at 152.09.

Tokyo Core Inflation

Data released today in Japan showed that Tokyo’s core consumer price index rose by 2.0% in January, the slowest pace since October 2024, below market expectations of a 2.2% increase, compared with a 2.3% rise in December.

The slowdown in prices clearly reduces inflationary pressure on Bank of Japan policymakers, narrowing the scope for further interest rate increases this year.

Japanese Interest Rates

• Following the data, market pricing for a quarter-point rate hike by the Bank of Japan at its March meeting fell from 20% to 10%.

• Investors are now awaiting further data on inflation, unemployment, and wages in Japan to reassess these expectations.

Monthly Performance

• Over January trading, which officially concludes at today’s settlement, the Japanese yen is up around 2.0% against the US dollar, on track for its first monthly gain since last August.

• On January 14, 2026, the yen hit an 18-month low of 159.45 per dollar, approaching the psychological 160 level, prompting Japanese authorities to issue clear warning statements in an effort to curb the currency’s decline and support stability in the FX market.

US–Japan Coordinated Intervention

Sources told Reuters that the New York Federal Reserve reviewed dollar-yen exchange rates with market participants on Friday, January 23, a move widely seen as a strong signal of potential intervention, amid ongoing and intensive coordination between US and Japanese authorities to address sharp market volatility.

Senior Japanese officials, including the finance minister and top diplomats, said on Monday that they are in “close coordination” with the United States on foreign exchange issues, based on a joint statement issued in September 2025.

Prime Minister Sanae Takaichi warned that the government would “take the necessary steps” against any abnormal or speculative moves in the market.

Meanwhile, Bank of Japan money market data indicated that the recent sharp rise in the yen against the dollar was unlikely to have been driven by direct official intervention.

China’s potential secret weapon in the global race to lead artificial intelligence innovation may lie in its vast electricity resources. While China has been quietly accelerating the development and integration of large language models, Western countries are facing growing trade-offs related to energy security in order to keep data centers running.

Rising power demand and the grid capacity required to support the expanding computational loads of AI are placing immense strain on electricity networks across the West. These grids were already fragile in the United States and Europe, as electrification accelerated and solar and wind capacity was added at a pace that outstripped investment in supporting infrastructure. As a result, large-scale power outages have become more frequent, alongside painful increases in energy prices.

Jeremy Forre, senior vice president of strategic sourcing at Straighten Energy, wrote in a recent opinion piece for Utility Dive: “As power demand rises and grid modernization accelerates, utilities and developers are facing a double pressure of global trade uncertainty and grid reliability.”

Paradoxically, however, China — the world’s largest installer of renewable energy and effectively the first true “electric nation” — does not suffer from the same problems, or at least not to the same existential degree.

One key difference is that China has invested heavily in expanding and upgrading its power grids, successfully aligning grid capacity with demand far more effectively than its Western counterparts. While China experienced a series of regional power outages earlier in the decade, it has not faced any major or dangerous nationwide outages since.

This places China in an exceptionally strong economic and geopolitical position. Relative abundance, stability, and lower electricity costs could give the country a significant edge in the global AI arms race. Alberto Vettoretti, managing partner at consultancy Dezan Shira & Associates, told the South China Morning Post recently: “In terms of power capacity, the gaps between China and the United States and the European Union are large, and China is clearly moving ahead in scale, structure, and growth momentum.”

Moreover, China has begun offering energy price subsidies for data centers after Chinese technology firms complained about power costs “driven by the use of domestically produced semiconductors, which are less efficient than Nvidia chips,” according to a recent Guardian report. These subsidies are part of a broader package of incentives aimed at supporting AI companies in China. Time magazine reported this week: “As AI dominance becomes a central government policy objective, every city and region is offering incentives to startups in the sector.”

Although China still lags behind the United States in the development and design of AI technologies, Chinese tech firms are positioned to catch up with, and potentially surpass, Silicon Valley in the not-too-distant future. The government’s “AI Plus” initiative, announced last August, sets out an ambition to “reshape production models and human life,” integrating AI into 90% of China’s economy by 2030.

For the world’s second-largest economy, this will require enormous amounts of electricity and vast grid capacity. Yet Beijing can also harness AI itself to improve grid efficiency. Artificial intelligence can play a central role in managing a power network that increasingly relies on volatile energy sources while simultaneously facing rising round-the-clock demand. Large language models can use supply-and-demand data to calculate fine-grained fluctuations in real time, at lower cost than many traditional computational models.

Fang Luorui of Xi’an Jiaotong-Liverpool University told Reuters earlier this month: “If AI models are well trained to accurately predict how much renewable electricity will be generated throughout the day and how much power will be needed at corresponding times, grid operators can decide how to balance supply and demand in advance, more efficiently and safely.”

China plans to comprehensively integrate artificial intelligence into its power grid by next year.

US stock indices fell during Thursday’s trading session, weighed down by renewed pressure on the technology sector as investors assessed the latest corporate earnings results.

Shares of software companies slid into bear market territory, amid growing concerns that the rapid pace of development in artificial intelligence technologies could undermine the business models of many firms operating in the sector.

Markets also digested the Federal Reserve’s decision on Wednesday to keep interest rates unchanged, alongside signals that economic activity continues to grow at a solid pace, with early signs of stabilization emerging in the labor market. These factors reinforced expectations that the US central bank may pause its rate-cutting cycle for a period.

In trading, the Dow Jones Industrial Average fell by 0.1%, or 67 points, to 48,948 by 17:11 GMT. The broader S&P 500 declined by 0.8%, or 57 points, to 6,921, while the Nasdaq Composite dropped sharply by 1.7%, or 415 points, to 23,445.