The US dollar is on track to post its largest weekly decline in nearly 12 weeks after weak US employment data prompted markets to scale back expectations of a near-term Federal Reserve interest rate hike, providing some relief for the Japanese yen, which has been under heavy pressure in recent months.

The euro climbed close to a two-week high of $1.1446, posting weekly gains of around 0.5%, while the British pound rose to $1.3355, up 1.1% for the week and on track for its strongest performance in nearly three months.

The Japanese yen also benefited from dollar weakness, strengthening to below 161 per dollar. However, markets remained alert to the possibility of intervention by Japanese authorities following Thursdays sharp rebound, which helped the currency recover from its 40-year low of 162.84 per dollar.

US job growth slows sharply

The dollar came under pressure after US labor market data showed a significant slowdown in job creation during June, while employment figures for the previous two months were revised lower.

The data led investors to reduce expectations for a near-term Federal Reserve rate hike.

Markets are now pricing in roughly a 45% probability of a rate increase at the September meeting, according to the CME FedWatch Tool. US Treasury yields also declined, with the two-year yield the most sensitive to monetary policy expectations falling by four basis points after three consecutive days of gains. US bond markets were closed on Friday for the Independence Day holiday.

Karl Steiner, Head of Research at SEB, said:

We do not expect a rate hike, so these figures support our view that the dollar will eventually weaken. I would not be surprised to see further downside from here.

The US Dollar Index, which measures the greenback against a basket of major currencies, fell around 0.2% to 100.77 points after declining 0.5% on Thursday. The index is now down about 0.6% for the week, marking its largest weekly loss since early April.

Japanese intervention concerns remain

Despite the yens recovery from its four-decade lows, investors remain cautious about the possibility of intervention by Japanese authorities, particularly given the lower market liquidity caused by the US Independence Day holiday.

Steiner said:

The risk of intervention should remain on traders radar, as Japanese authorities have historically preferred to act when liquidity is thin.

Japan renewed its warnings about excessive currency moves on Friday, with Finance Minister Satsuki Katayama stating that Tokyo remains in close contact with Washington regarding foreign exchange issues and stands ready to support the yen if necessary.

Chief Cabinet Secretary Minoru Kihara also said the government is monitoring market developments closely and with a high degree of vigilance.

Investors are increasingly concerned that Japanese authorities may have abandoned their traditional approach of verbally signaling intervention beforehand, opting instead for a more targeted strategy aimed at squeezing speculators and increasing the cost of betting against the yen.

Tony Sycamore, market analyst at IG, said the dollars rise to a 40-year high against the yen could prove to be a short-term peak. However, he noted that the medium-term direction will ultimately depend on upcoming US economic data and developments in Japans government bond market.