Investing.com – Most Asian currencies weakened on Friday while the dollar hit its highest level in more than two years as investors braced for a potentially powerful nonfarm payrolls reading due later in the day.

Weak inflation data from China also dampened sentiment in the region, with investors speculating on a potential interest rate boost by the Bank of Japan, although this provided only transient support for the yen.

The dollar moved slightly in overnight trading due to a bank holiday in the US. However, the dollar remained positive after hawkish signals from the Federal Reserve at the beginning of the week.

The dollar is stable near its highest level in two years on rising non-farm payrolls data

Both indexes strengthened slightly in Asian trade and are just below their highest levels since November 2022.

The main focus was on December data, which will be released on Friday, to provide more information on the US economy and interest rates.

The dollar was strengthened by the minutes of the Fed’s December meeting published on Wednesday, which repeated the central bank’s warning that interest rates will fall at a slower pace this year.

The minutes also showed that policymakers are concerned about President-elect Donald Trump’s expansionary and protectionist policies, which may support inflation in the long run.

Japanese yen weakens despite powerful spending data

The Japanese yen reversed Thursday’s gains and weakened on Friday, with the pair rising 0.2% and holding above the 158 yen level.

The stronger-than-expected data published on Friday sparked increased speculation about a January interest rate boost by the Bank of Japan, especially since the data released on Thursday showed a larger-than-expected boost in interest rates.

Analysts expect that the positive cycle of high wages, stable inflation and improving private consumption will result in further interest rate increases by the BoJ in the coming months, potentially after the BoJ meeting in delayed January.

However, the yen saw short-lived support for the idea as it came under pressure from the prospect of higher longer-term U.S. interest rates.

Broader Asian currencies weakened on Friday amid a similar development, with investors particularly reluctant to view the region ahead of the non-farm payrolls data reading.

The Chinese yuan pair rose 0.3%, with the currency seeing further weakness following supple inflation data for December. The prospect of trade tariffs under Trump has also soured sentiment toward China.

The Australian dollar pair fell 0.2% and was close to a two-year low as mixed inflation data released earlier this week reinforced expectations of earlier interest rate cuts by the Reserve Bank.

The South Korean won pair rose 0.4% amid continuing political conflicts in the country, while the Singapore dollar pair rose 0.1%.

The Indian rupee pair stabilized below the level of 86 rupees.