Asia FX strengthened as rate cut dents dollar; yen firms as BOJ holds course

Most Asian currencies firmed on Friday, while the dollar nursed losses after the Federal Reserve cut rates by a wide margin and kicked off an easing cycle.

The Japanese yen was among the better performers, strengthening after the Bank of Japan held interest rates and said it expected steady increases in inflation and economic growth.

The Japanese yen firmed

The Japanese yen strengthened on Friday, with the USD/JPY pair dipping 0.2% to 142.28.

The Bank of Japan (BOJ) held its interest rates steady in a unanimous decision but signaled an optimistic outlook on inflation and economic growth, forecasting steady increases in both.

Although the central bank refrained from any explicitly hawkish measures, its forecast of higher inflation has fueled market expectations that the BOJ could raise rates in the near future. Several policymakers have indicated that further rate hikes may be necessary in the coming months, especially as inflationary pressures grow.

The BOJ's announcement followed shortly after data revealed that Japan’s consumer price index surged to a 10-month high in August, driven by rising wages and stronger private consumption.

Despite the yen's losses over the week, it remained near its strongest levels of 2024, hit earlier in the week. The prospect of higher interest rates is expected to support the yen in the months ahead.

The dollar index fell slightly

The dollar index and dollar index futures edged lower in Asian trading, continuing their overnight decline as markets factored in expectations of lower U.S. interest rates.

The Federal Reserve cut rates by 50 basis points and initiated an easing cycle that could reduce rates by as much as 125 basis points by the end of the year.

However, Fed Chair Jerome Powell tempered market sentiment with a less dovish outlook for medium-to-long-term rates, noting that the central bank's neutral rate is expected to remain higher than in previous cycles. His remarks helped curb the dollar’s losses and even triggered a brief rise in the currency following the Fed's decision on Wednesday.

Dollar selling has remained muted since the Federal Reserve lowered borrowing costs after more than a year of steady rates, likely due to the central bank signaling a more cautious and gradual path for future monetary easing. This complicates the outlook for the dollar in relation to other major global currencies. However, Kit Juckes, head of foreign-exchange strategy at Societe Generale, noted in a Friday report that this could help support the dollar's strength despite the easing, ahead of the CFTC data release.

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