Asia FX firms with yen near 8-mth high; dollar down on rate cut bets

Investing.com– Asian currencies firmed on Friday, while the dollar retreated as markets bet that the Federal Reserve will kick off an easing cycle from next week, with focus squarely on the scale of a potential interest rate cut. 

The Japanese yen was the best performer among its Asian peers, coming close to its strongest level since early-January amid persistent expectations for a hawkish Bank of Japan. 

Dollar heads for second weekly loss on rate cut bets 

The dollar index and dollar index futures were both down 0.3% in Asian trade, extending losses from the prior session. 

The greenback was set for mild weekly losses- its second week in red, as traders stuck to expectations of interest rate cuts despite some strong inflation readings this week.

While the inflation readings initially saw bets shift towards a 25 basis point reduction by the Fed next week, some soft labor market data put bets on a 50 bps reduction back in play. 

Markets are pricing in a 56% chance the Fed will cut rates by 25 basis points next week, along with a 44% chance for a 50 bps reduction, CME Fedwatch showed. 

The central bank is widely expected to kick off an easing cycle from next week following dovish signals from a slew of Fed officials in recent weeks. Analysts expect at least 100 bps worth of cuts this year from the central bank, with two more meetings left in the year after September. 

Lower rates bode well for risk-driven Asian currencies, given that they free up more liquidity for investing in overseas markets.

Japanese yen near 8-mth peak, hawkish BOJ speak in focus 

The Japanese yen was the best performer in Asia, with the USDJPY pair falling 0.7% to its lowest level since early-January.

A string of hawkish comments from BOJ officials boosted the currency this week, especially as the called for more interest rate hikes by the central bank. 

While soft producer inflation data slightly undermined this sentiment, a Reuters poll released on Friday showed analysts positioning for a strong consumer inflation reading next week.

The BOJ is also set to meet next week, although analysts are uncertain whether the central bank will hike rates again after a 15 bps raise in late-July. 

Broader Asian currencies rose on the prospect of lower U.S. interest rates, as well as a weaker dollar.

The Australian dollar’s AUDUSD pair added 0.1%, while the Chinese yuan’s USDCNY pair fell 0.2%.

The South Korean won’s USDKRW pair fell 0.5%, while the Singapore dollar’s USDSGD pair fell 0.2%. 

The Indian rupee lagged its peers, with the USDINR pair steadying just below 84 rupees.