FOREX-Aussie jumps, yen slumps as rates play dominates in February

By Rae Wee

SINGAPORE, Feb 27 (Reuters) - The Australian dollar was poised for another sharp monthly gain on Friday as expectations grow for a more hawkish central bank, while the yen was headed for a loss as the Bank of Japan contends with an emboldened reflationist prime minister.

Investors have had to grapple this month with geopolitical tensions, a pivotal U.S. Supreme Court ruling over Trump's tariffs and fickleness over the artificial intelligence trade, among other developments.

But while the broader markets remained volatile, moves in the currencies for the month were driven primarily by shifting rate expectations.

"The rates are reflecting the changing macro situation," said Sim Moh Siong, a currency strategist at OCBC.

"Last year was about which central banks will cut rates and by how much. This year, the focus has shifted towards which central banks will lead in terms of hiking rates."

The Australian dollar AUD=, which was steady at $0.7106 on Friday, was on track for a monthly gain of roughly 2%.

Up more than 6% for the year thus far, the Antipodean currency is the best-performing G10 currency to date, as a domestic economy in rude health continues to fuel expectations for a more hawkish Reserve Bank of Australia. 0#AUDIRPR

"It is conceivable that the Aussie dollar can put on one or two more (U.S.) cents from here," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

"We are still of the view that there will be just one more 25-basis-point rate hike from the RBA this year."

Also on the hiking path is the Bank of Japan, though that has done little to help the yen JPY= as domestic politics complicates the rate outlook, even as BOJ Governor Kazuo Ueda signalled openness to a near-term hike.

While the yen was up 0.2% at 155.78 in Asia, it has fallen 0.4% for the week and 0.6% for the month thus far.

This week, Japan's government nominated two academics seen by markets as strong advocates of economic stimulus to join the BOJ's board. The surprise move sends a not-so-subtle message about Prime Minister Sanae Takaichi's distaste for higher interest rates, casting doubt on how much further policy can be tightened.

"Ueda flagging a possible March/April hike did little to support the yen because the guidance remains conditional on incoming data, and the political optics around appointments make markets question the pace and conviction of policy normalisation," said Saxo's chief investment strategist Charu Chanana.

ASSESSING THE RATE OUTLOOKS

Sterling GBP= was steady at $1.3484, set to snap three straight months of gains with a 1.5% fall in February.

The British pound has been undermined by a dovish tilt from the Bank of England, with traders now pricing in an 83% chance of a rate cut in March. 0#GBPIRPR

Elsewhere, the dollar =USD was set to gain 0.6% for the month, helped by a slightly more hawkish Federal Reserve after "several" policymakers signalled at January's policy meeting their openness to rate hikes if inflation remains elevated.

Nonetheless, investors continue to price in two more Fed cuts this year. 0#USDIRPR

"I think because there's still lingering concerns about what the Fed would be like under new Fed Chair Kevin Warsh," said OCBC's Sim.

The U.S. Supreme Court's decision to strike down Trump's tariffs also reinforced checks and balances on presidential power, which provided some support to the dollar, said analysts.

"It suggests that the long-term prospects for the U.S. dollar might not be as grim as previously imagined," said Macquarie Group's FX and rates strategist Gareth Berry.

Moves in the euro EUR= were more muted, with the common currency little changed at $1.1796 on Friday and headed for a monthly loss of just over 0.4%.

Expectations are for the European Central Bank to keep rates steady for months to come. 0#EURIRPR

In China, the country's central bank said on Friday it will scrap foreign exchange risk reserves for some forwards contracts, a move that would reduce the cost of dollar buying.

The decision comes after the yuan climbed 4.4% against the dollar in 2025, its biggest annual gain since 2020, with the upward momentum continuing into the new year.

The offshore yuan CNH= was last down 0.2% at 6.8585 per dollar, ahead of the onshore trade open.