The US dollar is heading on Friday to end its worst week since late July, amid rising uncertainty driven by the US government shutdown, while the Japanese yen retreated from its highs this week as investors await the Bank of Japans next move ahead of the ruling partys leadership election at the weekend.

The dollar index, which measures the US currency against a basket of major peers, slipped 0.1% to 97.78. The euro rose 0.2% to 1.17355 dollars, while the British pound gained 0.2% to 1.346 dollars.

Michael Brown, head of research at Pepperstone, said: We now have a US government shutdown that has no direct practical impact, but it means market participants lack the usual economic data such as todays nonfarm payrolls report, which explains the weakness and quiet tone in trading.

He added that the upcoming ISM data from the US is unlikely to be market-moving.

As for the yen, it slipped 0.1% to 147.375 per dollar after earlier falling 0.4%, though it remains on track for a weekly gain of about 1.4%, its largest since mid-May.

This weakness followed cautious remarks from Bank of Japan Governor Kazuo Ueda about the global economy, reducing expectations of an imminent rate hike. Investors are also awaiting Saturdays Liberal Democratic Party leadership election, which will decide the countrys next prime minister. Brown noted: Markets were somewhat disappointed that Ueda did not show a clear inclination toward an October hike as some of his colleagues have recently, and this weighed on the yen.

Meanwhile, the Bank of Japans Tankan survey on Wednesday showed an improvement in sentiment among major manufacturers for a second consecutive quarter. Deputy Governor Shinichi Uchida also pointed Thursday to improving business conditions and higher corporate profits despite pressure from US tariffs.

But Ueda reiterated in his Friday speech that global factorsparticularly the performance of the US economywill shape the outlook for wages and prices in Japan. Goldman Sachs analysts wrote in a note: Uedas comments support our view that the probability of an October hike is very low.

On the political front, Japan heads to elections on Saturday that will influence the budget and central bank policies. Among the leading contenders, long-serving politician Sanae Takaichi, who favors accommodative policy, could add to uncertainty in the bond market, while Agriculture Minister Shinjirō Koizumi and Chief Cabinet Secretary Yoshimasa Hayashi are seen as less likely to bring major shifts.

In the US, a Chicago Fed reportbased on public and private datashowed the unemployment rate held steady at 4.3% in September, unchanged from August, suggesting a sharp rise in joblessness has yet to begin. But details of the report, along with other data, reflected labor market weakness, as Wednesdays ADP report showed a 32,000-job decline in the private sector in September, reinforcing expectations for two more Fed rate cuts this year.

Traders now see a 25-basis-point cut in October as virtually certain, while pricing in an 89% chance of another cut in December, according to CMEs FedWatch tool.

Dallas Fed President Lorie Logan said Thursday that last months rate cut was an appropriate step to prevent severe labor market deterioration, but added that the slowdown remains gradual and expressed reluctance toward further easing at this stage.

Elsewhere, investors are awaiting speeches from several top central bankers at a farewell symposium for outgoing Dutch central bank chief Klaas Knot, including ECB President Christine Lagarde and Bank of England Governor Andrew Bailey.