Asian currencies saw a gain on Friday, with the Japanese yen standing out as it approached its highest level in eight months. This rise in the yen comes amid ongoing speculation about a hawkish stance from the Bank of Japan. Meanwhile, the U.S. dollar weakened as markets anticipate a Federal Reserve rate cut starting next week.
Dollar Retreats Amid Rate Cut Expectations
The dollar index and dollar index futures both fell by 0.3% in Asian trading, extending the previous day’s losses. This decline places the dollar on track for its second consecutive weekly loss. Traders are maintaining their expectations for an interest rate cut by the Federal Reserve, despite recent strong inflation data.
Initially, inflation readings had shifted expectations toward a 25 basis point cut by the Fed. However, recent soft labor market data has renewed speculation about a potential 50 basis point reduction. According to CME Fedwatch, there is a 56% chance the Fed will cut rates by 25 basis points next week, and a 44% chance of a 50 basis point cut.
Japanese Yen’s Strong Performance
The Japanese yen emerged as the strongest performer in Asia, with the USD/JPY pair dropping 0.7% to its lowest level since early January. This appreciation is partly due to hawkish statements from Bank of Japan officials, who have been advocating for more interest rate hikes.
Although recent producer inflation data slightly dampened this optimism, a Reuters poll indicates that analysts are preparing for a robust consumer inflation report next week. The BOJ is scheduled to meet next week, but it remains uncertain whether the central bank will implement another rate hike following the 15 basis point increase in late July.
Broader Asian Currency Trends
Other Asian currencies also gains and benefits from the anticipated lower U.S. interest rates and a weaker dollar. The Australian dollar rose by 0.1%, while the Chinese yuan fell by 0.2%. The South Korean won decreased by 0.5%, and the Singapore dollar fell by 0.2%. The Indian rupee lagged behind its peers, with the USD/INR pair holding steady just below 84 rupees.
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