Australian foreign exchange: Asian foreign exchange gains, dollar retreats ahead of non-farm payrolls

Most Asian currencies rallied on Friday, taking advantage of continued weakness in the dollar as markets bet that the Federal Reserve's rate hike cycle could pause, with focus turning to key labor data later in the day.

The interest-rate-sensitive won was the best-performing currency on the day, rising 0.5 per cent on a sharp rally that extended the previous session. It was also set to end the week up nearly 1.6 per cent amid less pressure on the dollar and Treasury yields.

The yen, which rose 0.2% in holiday-sparse trading on the back of increased demand for safe havens, is set to end the week higher by about 1.7%. Fears of a US banking crisis, coupled with Federal Reserve warnings of a possible recession this year, have benefited haven assets such as the yen and gold, which hit record highs this week.

The yuan lagged behind other currencies and struggled in the water as lower-than-expected service sector activity data raised concerns that China's post-COVID economic rebound was slowing.

The reading follows an unexpected contraction in manufacturing data, suggesting that China's biggest economic driver is still struggling despite the lifting of anti-corruption measures this year.

The dollar is set to end the week lower, with the dollar index and dollar index futures down 0.2 per cent each on Friday, amid wider selling of green coins this week as the Federal Reserve signalled it was considering a possible pause in its rate hike cycle.

Fed fund futures prices showed a more than 90 per cent chance that the Fed will hold rates steady in June, making May's move the last of the year, a perception further fuelled by a brewing banking crisis and signs of cooling economic growth.

But the central bank also warned that future interest rate action would be largely determined by inflation and labor market data. Inflation trends remain well above the central bank's target range, and the U.S. labor market remains tight.

To that end, markets are now waiting for April non-farm payrolls data to be released later on Friday. While the data is expected to show the labour market has cooled somewhat from the previous month, any upside surprises could factor into the Fed's decision.

The broader Asian currency rallied on hopes of a possible Fed pause, with the Singapore dollar and Taiwan dollar each up about 0.2 percent and the Thai baht up 0.3 percent.

The Australian dollar rose 0.6 percent 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.