The U.S. dollar edged higher to the trading week, helped by positive news about the U.S. jobs market, while the Japanese yen gained after a relatively hawkish Bank of Japan policy meeting.

The dollar received a boost in the previous session after data showed that the number of Americans filing new applications for unemployment benefits fell last week, reversing the prior week’s jump.

Initial claims for state unemployment benefits decreased 33,000 to a seasonally adjusted 231,000 for the week ended September 13. Claims in the prior week had jumped to 264,000, a level last seen in October 2021.

“This was rare positive news on the jobs market, and one that justifies the dollar’s staying bid for now,” said analysts at ING, in a note.

This helped the greenback rebound after the Federal Reserve cut interest rates on Wednesday -- the first time such reduction in months -- and suggested the likelihood of two more drawdowns this year.

That said, “we still think the dollar is trading too much on the strong side after the Fed meeting and expect some pullback in the coming days. Cheaper funding costs should contribute to fuel hedging demand for the USD and prevent larger appreciative trends,” ING added.

Foreign exchange traders are also keeping a wary look on the political outlook as the U.S. Supreme Court on Thursday set a date of November 5 for arguments it will hear concerning the legality of Trump’s global tariffs.

Trump has also repeatedly criticised the Fed for not cutting rates quickly and more deeply, stoking concerns about the independence of the U.S. central bank.

On Thursday, the Trump administration asked the U.S. Supreme Court to let the president move ahead with firing Federal Reserve Governor Lisa Cook, a move without precedent.

Despite the strengthening in the dollar to close out the week, analysts have flagged an uptick in hedging behavior, with foreign investors buying U.S. assets and selling the dollar as a hedge.

Writing in a note to clients, strategists at BofA highlighted "renewed USD weakness" as "investors are becoming increasingly focused on foreign exchange hedging of USD denominated risk." Over the past three months, the dollar index has dipped by over 1%.

"[T]his will remain a theme for some time on our expectation that USD is likely to depreciate further from overvalued levels," they wrote. "In our view, holding a constructive view on U.S. equities is only compatible with appropriate foreign exchange hedging of that exposure."

They added that that while a shift in currency reserve allocations away from the dollar has been "gradual," the process of "de-dollarization" -- the process by which countries lower their reliance on the greenback in international transactions and reserves -- has been "evident."

Reserve managers have instead stated a bias towards owning non-traditional reserve currencies such as the Australian and Canadian dollars, "as well as entertaining investments in currencies" from the so-called "BRICS" nations like Brazil, Russia, India, China and South Africa, the BofA analysts said.

While they described such changes in reserve allocations can be "slow-moving ships," the "bifurcation" in foreign exchange reserves is "likely to be a dominant theme" in a broader set of currencies.

"However, if the level of interest rates is a dominant driver, then currencies such as [sterling] and [the Australian dollar] could perhaps be the beneficiaries against the backdrop of falling U.S. rates and ongoing concerns over Fed independence," the analysts said.