Investing.com– Asian currencies rose on Friday while the dollar fell as markets bet the Federal Reserve will begin an easing cycle next week, with attention focused on the scale of a potential interest rate cut.

The Japanese yen was the best performer among Asian currencies, approaching its highest level since early January, boosted by persistent expectations of aggressive policy from the Bank of Japan.

Dollars lose second week on interest rate cut bets

Both stocks and currencies fell 0.3% in Asian trade, extending losses from the previous session.

The US dollar was expected to fall modestly for the week, marking a second straight week in the red as investors clung to expectations of interest rate cuts despite sturdy inflation readings this week.

Although inflation readings initially prompted the Fed to cut rates by 25 basis points next week, some delicate labor market data has rekindled concerns about the possibility of a 50 basis point cut.

Markets are pricing in a 56 percent probability that the Fed will cut rates by 25 basis points next week and a 44 percent probability of a 50 basis point cut.

The central bank is widely expected to begin an easing cycle next week after dovish signals from a number of Fed officials in recent weeks. Analysts expect at least 100 basis points of cuts from the central bank this year, with two more meetings in the year after September.

Lower interest rates bode well for risk-on Asian currencies as they free up more liquidity that can be used to invest in overseas markets.

Japanese Yen Nears 8-Month High, BOJ’s Hawkish Statements in Focus

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

A series of hawkish comments from Bank of Japan officials helped boost the currency this week, especially as the central bank pressed for further interest rate hikes.

While data on delicate manufacturer inflation somewhat undermined that sentiment, a Reuters poll released on Friday showed analysts expecting a sturdy reading next week.

However, analysts are unsure whether the central bank will raise interest rates again after it hiked them by 15 basis points in slow July.

Asian currencies gained on the prospect of lower US interest rates and a weaker dollar.

The Australian dollar gained 0.1%, while the Chinese yuan lost 0.2%.

The South Korean won fell 0.5%, while the Singapore dollar fell 0.2%.

The Indian rupee lagged behind its rivals, with its value stabilising just below Rs 84.