Asian exchange rates moved in different directions on Friday, with the Japanese yen sliding despite a Bank of Japan rate increase, while the U.S. dollar stayed supported by markets pricing additional tightening from the Federal Reserve.
The U.S. Dollar Index was largely unchanged at 100.23, keeping it close to a seven-week peak reached on Thursday.
Yen reaction to BOJ move
USD/JPY climbed about 0.7% to hover near 157 yen after the BOJ raised its policy rate by 25 basis points to 1.25% in a 7-2 vote. Although the hike pushed the policy rate to its highest level in three decades, two members of the policy board dissented in favour of keeping rates unchanged, a development that softened expectations for a rapid sequence of further increases.
Analysts at Capital Economics noted the potential for the board to become more dovish over time, saying, "With the two most hawkish Board members set to depart next July, the composition of the Board will probably become even more dovish." Markets looked to Governor Kazuo Ueda's press conference for signals about the timing and tempo of any additional tightening.
On the data front, Japan's August core consumer prices excluding fresh food rose 1.7% year-on-year, slightly below the 1.8% gain economists had expected and unchanged from July. A related gauge that excludes both fresh food and fuel, a closely watched measure of underlying inflation pressures, increased 1.9% from a year earlier. The softer-than-anticipated core reading provided little impetus for markets to sharply accelerate pricing in further BOJ tightening.
Dollar supported by Fed outlook
The greenback's firmness reflected market expectations that the Federal Reserve could tighten policy again. Fed funds futures implied a roughly 53% probability of a 25 basis-point hike at the next Fed meeting, according to the CME Group's FedWatch tool. The Fed itself raised its policy rate by 25 basis points on Wednesday to a 3.75%-4.00% range and its updated projections pointed to one additional increase this year.
Among other major Asian currency moves, the Australian dollar strengthened, with AUD/USD up about 0.3%. USD/CNY moved slightly lower, with the onshore yuan edging down around 0.2%, while USD/KRW rose roughly 0.4% as the South Korean won weakened. USD/SGD and USD/INR traded largely flat on the session.
Markets were also contending with higher U.S. yields and elevated energy prices, factors that weighed on investor sentiment and contributed to divergent currency performances across the region.
Outlook and market focus
Traders were focused on central bank signals and incoming economic data for clues about the future path of policy in major economies. The BOJ's vote split and the latest inflation prints left room for varied interpretations of Japan's tightening trajectory, while the Fed's stance kept the dollar supported and added to the complexity of cross-rate moves in Asia.
With liquidity and yield dynamics continuing to shape price action, currencies sensitive to global funding conditions and commodity prices were likely to remain responsive to shifts in U.S. rates and energy costs.