Japanese Yen and U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration

By Rocky Swift

TOKYO (Reuters) -The yen edged lower on Friday, trimming its sharpest weekly gain in more than four months, as traders considered the impact of potential rate increases by the Bank of Japan and a leadership election this weekend.

BOJ Governor Kazuo Ueda reiterated that the central bank would continue raising interest rates if the economy and prices move in line with its forecast. Markets are also focused on a Liberal Democratic Party election on Saturday that will determine Japan's next prime minister.

The dollar rebounded overnight despite a closure of the U.S. government that has halted the publication of key economic data, including the closely watched monthly jobs report for September that was due to be released on Friday. Canada's currency held near a four-month low on a slide in oil prices.

"The government shutdown has not had a major short-term impact, but if anything, underlying pressure remains toward a weaker dollar," said Hirofumi Suzuki, the chief currency strategist at SMBC.

"That said, with yen-depreciation pressure likely to linger ahead of this weekend's LDP leadership election, the pair is likely to hover around current levels," he added.

The yen slid 0.2% to 147.52 per dollar, still on track for a 1.3% advance this week that would be the biggest since mid-May.

The dollar index, which measures the greenback against a basket of key currencies, tacked on 0.1% to 97.895. The euro was little changed at $1.1721.

Markets were keeping a close eye on speeches by BOJ officials this week after the central bank's tankan survey on Wednesday showed confidence among big manufacturers improved for the second straight quarter.

Governor Ueda said the central bank expects the global economy to resume a moderate recovery path but much will depend on the U.S. economic outlook. Deputy governor Shinichi Uchida said on Thursday that the business mood is improving and corporate profits remain high even as U.S. tariffs weigh on exports.

Ueda's comments "could be used to guide the market further towards a rate hike at the BOJ's next meeting on October 30th," IG Markets analyst Tony Sycamore wrote in a note.

In the U.S. overnight, a Chicago Fed report that combines private and available public data estimated the September jobless rate was 4.3%, the same as in August and evidence that a feared rapid rise in unemployment had not yet begun.

But details of the report, along with other data, pointed to sluggishness in the labor market. The ADP National Employment report on Wednesday showed private payrolls decreased by 32,000 in September, boosting expectations that the Federal Reserve will cut interest rates two more times this year.

Traders see a 25-basis-point cut at the Fed's October meeting as almost certain and are pricing in a 90% probability of an additional cut in December, according to the CME Group’s FedWatch Tool.

Dallas Fed President Lorie Logan on Thursday said the central bank appropriately cut rates last month to guard against the risk of a sharp deterioration in the job market, but said that so far the cooling has been gradual and signalled she is not eager to cut rates further.

The Canadian dollar weakened to a four-month low against its U.S. counterpart on Thursday as the price of oil fell more than 2% and investors worried about negotiations to renew a U.S.-Mexico-Canada trade agreement.

The Canadian currency traded little changed at 1.3962 per U.S. dollar after touching 1.3986 on Thursday, its weakest intraday level since May 16.

(Reporting by Rocky SwiftEditing by Shri Navaratnam)