Asia FX rises, dollar retreats ahead of nonfarm payrolls

Investing.com -- Most Asian currencies advanced on Friday, capitalizing on sustained weakness in the dollar as markets bet on a potential pause in the Federal Reserve’s rate hike cycle, with focus turning to key labor data due later in the day.

The rate-sensitive South Korean won was the best performer for the day, rising 0.5% in an extension of sharp gains from the prior session. The won was also set to close the week nearly 1.6% higher, amid easing pressure from the dollar and Treasury yields.

The Japanese yen rose 0.2% in holiday-thinned trade, and was set to close the week about 1.7% higher as it benefited from increased safe haven demand. Fears of a U.S. banking crisis, coupled with a warning from the Fed on a potential recession this year, saw safe havens such as yen and gold benefit this week, with the latter reaching record highs.

The Chinese yuan lagged its peers, treading water as softer-than-expected service sector activity data drummed up concerns that a post-COVID economic rebound in the country was slowing down.

The reading came on the heels of an unexpected contraction in manufacturing data, showing that China’s biggest economic drivers were still struggling despite the lifting of anti-COVID measures this year.

The dollar was set to close the week lower, with the dollar index and dollar index futures falling 0.2% each on Friday. The greenback saw extended selling this week as the Fed signaled that it was considering a potential pause in its rate hike cycle.

Fed Funds futures prices show that markets are pricing in an over 90% chance that the Fed will hold rates steady in June, likely making May’s hike its last for the year. A brewing banking crisis, coupled with signs of cooling economic growth, also furthered this notion.

But the central bank also warned that future rate action will be largely determined by inflation and labor market data. Inflation is still trending well above the central bank’s target range, while the U.S. labor market remains tight.

To that end, markets are now awaiting nonfarm payrolls data for April, due later on Friday. While the reading is expected to show that the labor market cooled from the prior month, any surprises to the upside could factor into the Fed's decision.

Broader Asian currencies rose on hopes of a potential Fed pause. The Singapore dollar and Taiwan dollar rose about 0.2% each, while the Thai baht added 0.3%.

The Australian dollar added 0.6% as a report from the Reserve Bank reiterated that interest rates could still rise further, after the bank surprised markets with a rate hike earlier this week.