As traders prepared for a potentially good nonfarm payrolls number later in the day, the dollar hovered around its best level in more than two years, while most Asian currencies declined on Friday.

Weak inflation data from China further damaged regional morale, and traders conjectured about a possible interest rate hike by the Bank of Japan, which only temporarily supported the yen.

Due to a U.S. market holiday, the dollar did not move much during overnight trading. However, after the Federal Reserve issued hawkish signals earlier this week, the dollar stayed positive.

Dollar steady near 2-yr high as nonfarm payrolls loom

Following a minor firming in Asian trade, the dollar index and dollar index futures were barely below its highest points since November 2022.
Nonfarm payrolls data for December, which was anticipated later on Friday, was the main focus because it provided additional clues about interest rates and the U.S. economy.

The Fed's December meeting minutes, which were made public on Wednesday, supported the dollar by restating the central bank's caution that interest rates will decline more slowly this year.

The minutes also revealed that policymakers were worried about Trump's expansionary and protectionist plans, which might eventually fuel inflation.

Japanese yen weakens despite strong spending data 

The USDJPY pair increased 0.2% and held above the 158 yen barrier on Friday as the Japanese yen retreated its gains from Thursday.

Given that data issued on Thursday revealed a larger-than-expected increase in wage growth, Friday's stronger-than-expected household expenditure data heightened expectations of a January interest rate hike by the Bank of Japan.

In the upcoming months, analysts anticipate that the BOJ will raise interest rates more frequently, possibly as early as its late-January meeting, due to a positive cycle of rising wages, stable inflation, and improving private consumption.

However, this idea only provided short-term support for the yen as it was pushed by the expectation of higher longer-term U.S. interest rates.

Broader Asian currencies declined on Friday on a similar notion,

Following dismal inflation figures for December, the Chinese yuan's USDCNY pair increased by 0.3%, indicating the currency's ongoing decline. Another factor that dampened opinion against China was the possibility of trade tariffs under Trump.

Bets on quicker interest rate cuts by the Reserve Bank were bolstered by mixed inflation data earlier in the week, which caused the Australian dollar's AUDUSD pair to drop 0.2% and approach a two-year low.

Amid ongoing political unrest in the nation, the South Korean won's USDKRW pair increased by 0.4%, while the Singapore dollar's USDSGD pair increased by 0.1%.

The USDINR exchange rate for the Indian rupee remained below the 86 rupee mark.