Asian currencies rose on Friday, while the dollar fell as markets bet the Federal Reserve will begin an easing cycle starting next week, with the focus squarely on the scope of a potential interest rate cut.
The Japanese yen was the best performer among its Asian counterparts, approaching its strongest levels since early January amid continued expectations of a tight monetary policy from the Bank of Japan.
Dollar heads for second weekly loss on rate cut bets
U.S. crude oil futures and the Japanese yen fell 0.3 percent in Asian trading, extending losses from the previous session.
The US dollar was on track for a slight weekly loss – its second week down – as traders held on to expectations of a rate cut despite some strong inflation readings this week.
While inflation readings initially saw bets shift toward a 25 basis point rate cut by the Fed next week, some weak labor market data has put bets on a 50 basis point rate cut back into play.
Markets are showing a 56% chance that the Fed will cut rates by 25 basis points next week, along with a 44% chance of a 50 basis point cut.
The central bank is widely expected to begin an easing cycle as early as next week following dovish signals from a number of Fed officials in recent weeks. Analysts expect at least 100 basis point cuts this year from the central bank, with two more meetings remaining in the year after September.
Low interest rates bode well for risk-averse Asian currencies, as they allow more liquidity to invest in overseas markets.
Japanese yen nears eight-month high, BOJ hawkish comments in spotlight
The Japanese yen was the best performer in Asia, with the pair falling 0.7% to its lowest level since early January.
A series of hawkish comments from Bank of Japan officials has boosted the currency this week, especially as the central bank called for further interest rate hikes.
Although weak producer price inflation data dampened that sentiment a bit, a Reuters poll released on Friday showed analysts were bracing for a strong reading next week.
However, analysts are unsure whether the central bank will raise interest rates again after increasing them by 15 basis points in late July.
Broader Asian currencies rose amid the possibility of a U.S. interest rate cut, as well as a weaker dollar.
The Australian dollar rose 0.1%, while the Chinese yuan fell 0.2%.
The South Korean won fell 0.5%, while the Singapore dollar fell 0.2%.
The Indian rupee lagged its peers, with the pair settling at just below Rs 84.