The dollar was close to a six-month high on the expectation of higher US rates for a longer period of time, while the yen was held at the mercy of skyrocketing US Treasury yields on Friday prior to the Bank of Japan's carefully watched rate announcement.
Early Asia activity saw the Japanese yen finish slightly down at 147.6, hovering close to the session's over 10-month lowest of 148.465.
The Bank of Japan is expected to maintain its ultra-easy monetary policies when it announces its interest rate decision on Friday at the completion of its two-day policy conference, closing a week full of central bank policy announcements.
Daniel Hurley, portfolio expert at T. Rowe Price, said that although they are more optimistic that the Bank of Japan can meet its 2% inflation target, they don't anticipate any adjustments until 2024, with the Shunto spring wage negotiations, which will begin next year, taking center stage.
Data released on Friday revealed that Japan's core inflation rate was stable in August and maintained its 17-month streak of staying over the central bank's 2% target.
The rise in US Treasury rates, which reached multi-year record highs in the preceding trading session as markets reacted angrily to the Federal Reserve's aggressive pause on Wednesday, was also a factor in keeping the yen under stress.
The two-year Treasury yield reached a 17-year high of 5.2020% on Thursday, while the 10-year Treasury yield, which the dollar/yen pair often tracks, reached a high of 4.4980% on the same day, its highest level since 2007.
The US dollar increased along with Treasury yields, reaching an over-six-month high of 105.74 in the previous trading session as measured against a group of currencies. The index was last stable at 105.39.
The Australian dollar lost 0.1% to $0.6410 against a stronger US dollar, retracing some of the gains it had gained the previous week and on track for a weekly decline of nearly 0.3%.
Similar to the Australian dollar, the New Zealand dollar fell 0.06% to $0.5928, although it eyed a rise of about 0.5% for the week.
The Fed held interest rates unchanged this week, but it hinted at the prospect of another increase this year, keeping rates much tighter than originally anticipated through 2024.
Given this context, Ray Sharma-Ong, investing director of multi-asset solutions from abrdn, said that they favor the US dollar. He believes that the Federal Reserve's hawkishness, the predicted reduction in the number of rate cuts it will make in 2024, the resilience of US economic growth, and projections of weaker growth in the euro zone compared to the US will all boost the US dollar's performance.
The euro declined 0.07% to $1.0655, having hit a six-month low of $1.0617 in the previous trading session.
On Thursday, the pound was down 0.02% at $1.2293 and had previously fallen to a six-month low of $1.22305 after the Bank of England stopped raising interest rates a day after Britain's rapid rate of price inflation unexpectedly slowed.
For the first time since December 2021, the Bank of England did not raise borrowing costs, which led traders to reduce their predictions for future rate hikes by the central bank.
Inflation appeared to be declining but still very high, and growth was approaching stagnation. Unless the bank was resolute in its aggressive posture, delivering an increase and ensuring more to come, the markets were probably going to see any decision fall short of what was needed, according to Daniela Hathorn, a senior market analyst of Capital.com.