The euro edged slightly lower in European markets on Friday against a basket of global currencies, extending its losses for a second consecutive day against the US dollar and heading toward a six-week low. The single currency is on track for a third straight weekly loss, after strong US labor market data supported buying of the American currency as the best available investment.

The European Central Bank’s chief economist warned of the risk of new shocks that could negatively affect economic forecasts and create financial difficulties that may influence the path of monetary policy in the euro area.

With inflationary pressures on ECB policymakers easing, expectations for at least one European interest rate cut this year have picked up.

Price Overview

• Euro exchange rate today: The euro fell against the dollar by about 0.1% to $1.1602, from the session opening level of $1.1608, after recording a high of $1.1614.

• The euro ended Thursday’s trading down 0.3% against the dollar, hitting a six-week low at $1.1593, following the release of strong US economic data.

Weekly performance

Over the course of this week’s trading, which officially ends at today’s settlement, the single European currency is down by about 0.3% against the US dollar, on track for a third consecutive weekly loss.

The US dollar

The dollar index rose by 0.1% on Friday, maintaining gains for a second straight session and trading near a one-and-a-half-month high, reflecting continued strength in the US currency against a basket of major and secondary currencies.

This rise comes as investors focus on buying the US dollar as the best available investment, especially amid a string of strong US economic data that have reduced expectations for two US interest rate cuts this year.

Kyle Rodda, an analyst at Capital.com, said the US dollar appears stronger at the start of the year. He noted that weekly US jobless claims data, along with some manufacturing sector surveys, came in better than expected, reducing the likelihood of an imminent interest rate cut by the Federal Reserve.

Chief economist

Philip Lane, Chief Economist at the European Central Bank, warned that any “potential deviation” by the US Federal Reserve from its core mandate could have a significant negative impact on global economic expectations.

Lane stressed that central bank independence is critically important, warning that new shocks stemming from political interference in US monetary policy could create uncertainty and unnecessary risk premiums in global markets, potentially forcing the ECB to reassess its future stance on interest rates.

European interest rates

• Data released last week showed a slowdown in headline inflation in Europe in December, pointing to easing inflationary pressures on the European Central Bank.

• Following those data, money market pricing for the probability of the ECB cutting European interest rates by about 25 basis points in February rose from 10% to 25%.

• Traders revised their expectations from the ECB keeping interest rates unchanged throughout this year to at least one rate cut of around 25 basis points.

• To reprice these expectations, investors are awaiting further euro area economic data on inflation, unemployment, and wages.

The Japanese yen rose in Asian markets on Friday against a basket of major and secondary currencies, moving away from an 18-month low against the US dollar, as bargain buying accelerated and after Japan’s finance minister hinted at the possibility of joint intervention with the United States to support the struggling currency.

According to Reuters, many officials at the Bank of Japan see scope for another interest rate hike, with some not ruling out an increase as early as April, as the yen’s weakness threatens to intensify rising inflationary pressures.

Despite the current rebound, the Japanese currency may record a third consecutive weekly loss, amid concerns linked to political developments in Japan, where Prime Minister Sanae Takaichi is likely to dissolve parliament and call an early general election in February.

Price Overview

• Japanese yen exchange rate today: The dollar fell against the yen by more than 0.4% to ¥157.97, from the opening level of ¥158.63, after recording a high of ¥158.70.

• The yen ended Thursday’s trading down 0.15% against the dollar, resuming losses that had paused the previous day during a recovery from an 18-month low of ¥159.45 per dollar.

Joint intervention to support the yen

Japan’s Finance Minister Satsuki Katayama said on Friday that the government “will not rule out any options” to address excessive and unjustified movements in the foreign exchange market, in a clear signal of the possibility of direct intervention to support the yen.

Katayama said the current weakness of the yen does not reflect Japan’s economic fundamentals and is hurting household purchasing power. She added that Japan remains in close contact with its international partners, especially the United States, to ensure that any action in currency markets is consistent with international understandings on exchange rate stability.

Speaking at her regular press conference, Katayama said that the joint statement signed with the United States last September “was extremely important” and included provisions related to foreign exchange intervention.

Felix Ryan, an FX strategist at ANZ, said that approaching the intervention stage is often accompanied by statements from Japan’s Ministry of Finance or government officials about yen levels, or by inquiries made to counterparties.

Ryan added that the significance of such remarks depends mainly on the dollar-yen level and the speed of its movements over a 24-hour period.

Japanese interest rates

• Four sources familiar with the matter told Reuters that some monetary policy officials at the Bank of Japan see the possibility of raising interest rates sooner than markets currently expect.

• These sources point to a potential rate hike decision at the April meeting, amid concerns that the continued decline of the yen could worsen rising inflationary pressures.

• The sources, who asked not to be identified because they are not authorized to speak to the media, said the Bank of Japan does not rule out early action if sufficient evidence emerges that the economy can achieve the 2% inflation target sustainably.

• Economists told Reuters that the Bank of Japan would most likely prefer to wait until July before raising the key interest rate again, with more than 75% expecting it to rise to 1% or more by September.

• Pricing for the probability of the Japanese central bank raising interest rates by a quarter percentage point at the January meeting remains steady below 10%.

• The Bank of Japan meets on January 22–23 to review economic developments and determine appropriate monetary tools for this sensitive phase facing the world’s fourth-largest economy.

Weekly performance

Over the course of this week’s trading, which officially ends with today’s settlement, the Japanese yen is down about 0.25% against the US dollar, on track for a third consecutive weekly loss.

Early elections

Hirofumi Yoshimura, leader of the Japan Innovation Party and a partner in the ruling coalition, said on Sunday that Takaichi may call early general elections.

Japan’s public broadcaster NHK reported on Monday that Prime Minister Sanae Takaichi is seriously considering dissolving the House of Representatives and calling an early general election in February.

Kyodo News said on Tuesday that Takaichi had informed ruling party leaders of her intention to dissolve parliament at the start of its regular session on January 23.

The Yomiuri Shimbun reported on Wednesday that Takaichi is considering holding an early lower house election on February 8.

The move to dissolve the current parliament comes as Takaichi seeks to strengthen her popular mandate and secure a comfortable parliamentary majority to ensure passage of the 2026 fiscal year budget and proposed economic reforms, particularly as the current government faces challenges in passing legislation in a divided parliament.

Views and analysis

• News of early elections has created political uncertainty among investors, immediately reflected in yen movements in currency markets, amid anticipation of how the elections could affect future Bank of Japan rate hike decisions.

• Eric Theoret, a currency strategist at Scotiabank in Toronto, said that early elections would give Takaichi an opportunity to capitalize on the strong popularity she has enjoyed since taking office last October.

• Theoret added that the implications for the yen are highly negative, as Takaichi is seen as an advocate of loose monetary and fiscal policy, and therefore comfortable with more flexible fiscal policy and larger deficits.

• Tony Sycamore, a market analyst at IG, said the looming elections are fueling yen weakness and weighing on Japanese government bonds due to “concerns about excessive fiscal expansion.”

• Sycamore added that the recent selling of the yen toward the key 160 level brings Japan’s Ministry of Finance noticeably closer to actual intervention.

Energy and resources experts agree that if the situation in Iran were to spiral out of control, it would have a massive impact on global oil markets and financial markets. This was not the case when Nicolás Maduro was ousted in Venezuela. The reason is simple: Iran produces roughly four times as much oil as Venezuela.

Andreas Goldthau, Director of the Willy Brandt School of Public Policy at the University of Erfurt, says:

“Iran is the third-largest producer in OPEC. Its output accounts for around 4% of global oil demand, while Venezuela produces only about 1%.”

The energy expert adds: “Iran is estimated to export around two million barrels per day, compared with no more than 350,000 barrels per day for Venezuela. Global markets would feel a much stronger impact if Iranian production were halted.”

In addition, fears of a regional conflict in the Gulf weigh heavily on the Iran outlook. Goldthau says: “Around half of the world’s oil reserves and a third of global oil production are located in the Middle East. As a result, political developments in Iran have a far greater impact on markets than events in Venezuela.”

OPEC statistics show that Venezuela’s estimated reserves of about 303 billion barrels are the largest in the world (one barrel equals 159 liters). However, these reserves consist largely of heavy crude that can only be extracted and refined using specialized technologies. A significant portion of this oil is also located in the remote Orinoco Belt.

Iran and Venezuela… international sanctions hinder the oil sector

Iran, like Venezuela, is subject to international sanctions on its oil sector. The country lacks access to the latest drilling and extraction technologies, while maintenance is costly due to shortages of spare parts and weak structural investment. In addition, the state controls the sector, making foreign investment more difficult, according to Goldthau. The same applies to refining operations.

He says: “Iranian refineries do not produce petroleum products of the quality expected by Western buyers. This, along with sanctions, is the result of Israeli and US attacks on Iran’s midstream sector.”

In the oil and gas industry, the midstream segment includes transportation, storage, and the initial processing of crude oil and natural gas after extraction. The US-based GPA Midstream association defines the role of companies in this segment as providing logistical efficiency and ensuring reliable delivery regardless of production fluctuations in countries such as Iran or Venezuela.

Remarkable resilience despite difficulties

Despite all these challenges, Goldthau describes Iran’s oil sector as having “shown a surprising degree of resilience,” at least in terms of output volumes, even though it has not returned to the six million barrels per day seen before the 1979 Islamic Revolution.

He says: “Production eventually recovered and stabilized at around four million barrels per day after falling to two million barrels per day in the 1980s. But the state treasury has been severely drained because Iran has for years been forced to sell its oil at steep discounts to secure buyers, preventing the investments the country desperately needed.”

Iran’s shadow fleet… a lifeline for oil smuggling

As with Russia, Iran’s covert fleet of oil tankers plays a central role in circumventing sanctions. Goldthau explains: “The Western sanctions regime has forced Iran to store part of its production. Tankers are increasingly being used to compensate for limited onshore storage capacity.”

These floating storage facilities are mostly located off Southeast Asia, close to major buyers, foremost among them China, which purchases more than 90% of Iran’s oil exports. Goldthau says: “Large volumes of Iranian oil are sitting offshore near Malaysia.” Tehran uses the National Iranian Tanker Company in these operations, which operates one of the largest tanker fleets in the world.

To evade sanctions, Iranian vessels operate in a manner similar to Russian ships, transferring sanctioned Iranian oil at sea to vessels that do not fly the Iranian flag, facilitating delivery to buyers.

Poverty instead of oil revenues

The social situation in Iran closely resembles that of Venezuela, where deteriorating oil infrastructure has worsened conditions, while energy subsidies consume the state budget and make it difficult for the government to provide affordable energy to the population.

The result is a fiscal crisis, a sharp currency depreciation, hyperinflation, and widespread protests.

One scenario in particular poses a serious threat to the ruling system in Tehran: if oil sector workers join the protest movement, it could signal the end of clerical rule. It remains unclear whether unrest has reached Khuzestan, Iran’s most important oil-producing region. Fortune magazine reported that it had seen no signs of a decline in oil exports.

Still, it is impossible to predict what might happen if oil workers respond to a strike call by Reza Pahlavi, the exiled son of Iran’s last shah. Oil strikes were the decisive factor in toppling the shah in 1978, when pressure escalated to the point that within months the monarchy collapsed and was replaced by Ayatollah Khomeini.

Could oil reach $120 a barrel?

If the Islamic Republic of Iran were to collapse, the regional balance of power would change dramatically. Mark Mobius, a pioneer in emerging market investing, warns: “The best outcome is a complete regime change. The worst is a prolonged internal conflict with the current regime remaining in place.”

If Iranian production were disrupted, oil prices would surge sharply in the short term. Over the longer term, however, other producers could fill the gap left by Iran. The International Energy Agency could also release strategic oil reserves to calm markets, according to Goldthau.

He cautions, however, that the greatest risk lies in the possibility of “dragging regional actors into the conflict.” If Iran were to close the Strait of Hormuz — a narrow waterway through which around 25% of global oil flows — oil prices could rise to as much as $120 a barrel, according to estimates by investment banks such as JPMorgan Chase.

Drilling platforms and oil refineries in neighboring countries could also come under attack, further affecting energy markets. Goldthau warns that with around 20% of global liquefied natural gas production also passing through the Strait of Hormuz, any such escalation could drive gas prices higher in Europe.

US stock indices rose during Thursday’s trading, supported by a rebound in semiconductor shares.

As corporate earnings continue to flow, several Wall Street banks reported their quarterly results today for the final quarter of 2025, including Goldman Sachs, Wells Fargo, and Bank of America.

In trading, the Dow Jones Industrial Average rose by 0.7%, or 375 points, to 49,525 points by 17:37 GMT. The broader S&P 500 climbed 0.6%, or 42 points, to 6,969 points, while the Nasdaq Composite advanced 0.8%, or 185 points, to 23,657 points.