Investing.com — Asian currencies firmed on Friday while the dollar retreated as markets bet the Federal Reserve will initiate an easing cycle starting next week, with the focus squarely on the size of a potential rate cut .
The Japanese yen was the best performer among its Asian peers, closing in on its strongest level since early January amid continued expectations for an hawkish Bank of Japan.
Dollar heads for second weekly loss on interest rate cut bets
The and both fell 0.3% in Asian trading, adding to losses from the previous session.
The dollar was set for mild weekly losses – its second week in the red as traders held on to expectations of rate cuts despite some strong inflation data this week.
While inflation data initially saw bets shifting to a 25 basis point cut by the Fed next week, some soft labor market data is putting bets on a 50 basis point cut back in play.
Markets are pricing in 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, it showed.
The central bank is widely expected to start an easing cycle starting next week, following dovish signals from a slew of Fed officials in recent weeks. Analysts expect a cut of at least 100 basis points by the central bank this year, with two more meetings in the year after September.
Lower interest rates bode well for risk-driven Asian currencies as they free up more liquidity for investing in overseas markets.
Japanese Yen Near 8-Month Peak, Aggressive BOJ Speaks Sharply
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 aggressive comments from BOJ officials boosted the currency this week, especially as the central bank called for more rate hikes.
While soft producer inflation data somewhat undermined this sentiment, a Reuters poll published on Friday showed analysts positioning themselves for a strong outcome next week.
The , although analysts are unsure whether the central bank will raise rates again after a 15 basis point rate hike at the end of July.
Broader Asian currencies rose on the prospect of lower US yields and a weaker dollar.
The Australian dollar pair rose 0.1%, while the Chinese yuan pair fell 0.2%.
The South Korean won pair fell 0.5%, while the Singapore dollar pair fell 0.2%.
The Indian rupee lagged its peers, with the pair staying just below 84 rupees.
