Asian exchange rate rises as dollar rate cuts; yen firms as BOJ steers clear of Investing.com

Investing.com– Most Asian currencies strengthened on Friday as the dollar pared losses after the Federal Reserve cut rates by a wide margin and kicked off an easing cycle.

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

The Chinese yuan also strengthened after the People’s Bank of China kept its benchmark rates unchanged, avoiding some expectations that it would cut rates to further support the economy.

A firm yen, as the BOJ holds rates, signals higher inflation

The Japanese yen strengthened on Friday, with the pair falling 0.2% to ¥142.28.

The BOJ in a unanimous decision and said it expects inflation and economic growth to rise steadily.

While the central bank gave no overt indication, its forecasts of higher inflation were linked to expectations that the BOJ would raise interest rates further. A host of policymakers have signaled that rates will continue to rise in the coming months, especially as inflation picks up.

The BOJ’s decision and forecasts came just hours after data showed inflation rose to a 10-month high in August as rising wages pushed private consumption higher.

While the yen had weekly losses, it still remained close to the strongest 2024 levels hit earlier in the week. Expectations of higher interest rates are likely to support the yen in the coming months.

The weaker dollar after the interest rate cut offsets less dovish Fed signals

And both edged lower in Asian trade, extending overnight declines as markets looked to lower U.S. interest rates.

The Fed also announced the start of an easing cycle, which could lead to a rate cut of up to 125 bps by the end of the year.

But Fed Chairman Powell offered a less dovish outlook for medium- and long-term rates, saying the central bank’s neutral rate will be much higher than seen in the past. His comments capped the dollar’s overall losses and also saw the greenback appreciate immediately after the Fed’s decision on Wednesday.

16-month Chinese yuan as the PBOC holds rates

The Chinese yuan strengthened on Friday, with the pair falling 0.3% to its lowest level since May 2023.

The yuan’s strength came as the PBOC kept its benchmark level steady, avoiding some expectations that it would cut rates further to stimulate the economy.

The PBOC’s decision came even as a number of recent economic indicators showed sustained weakness in China.

But media reports said the PBOC instructed local banks to buy dollars and limit the yuan’s overall strength, given that a stronger yuan also hurts Chinese exports.

Broader Asian currencies strengthened after the Fed decision. The Australian dollar rose 0.2% and was close to an eight-month high.

The South Korean won pair was an outlier, up 0.2%, while the Singapore dollar pair fell 0.1%.

The Indian rupee pair fell 0.1%, retreating further from record highs hit earlier this year.