Asian shares extend rally, yen edges higher as BOJ holds line

By Stella Qiu

SYDNEY (Reuters) -Asian shares extended their rally on Friday, bathing in the afterglow of an outsized interest rate cut in the United States, while the yen edged higher as the Bank of Japan held rates steady and stayed upbeat on the economy.

In China, the central bank kept its benchmark lending rates on hold, countering expectations for a move lower. Chinese shares were an outlier in the region, with blue chips down 0.3%. The onshore yuan strengthened to the highest in nearly 16 months, leading to intervention by state banks to prevent it from appreciating too fast.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.7% to the highest in two months, tracking overnight gains on Wall Street. The index was headed for a weekly gain of 2.5%.

The Nikkei jumped 2.1%, helped in part by a weaker yen as bulls took some profit from the recent rally to 14-month highs. It is up 3.5% for the week. Nikkei futures were largely unmoved by the BOJ decision.

The central bank kept its short-term rate steady at 0.25% on Friday as widely expected, but upgraded its view on consumption. The market's focus will be on any hints from Governor Kazuo Ueda on the timing and pace of further hikes at the post-meeting press conference at 0630 GMT.

The dollar was last down 0.2% at 142.31 yen, having gained about 1% this week. Data released on Friday showed Japan's core inflation accelerated for a fourth consecutive month, reinforcing the case for further policy tightening.

"Today's meeting is not expected to alter the current monetary policy outlook, with the BOJ's next rate hike expected to be in December," said IG analyst Tony Sycamore.

"If Ueda were to put additional emphasis on the bank's positive outlook on prices and economic activity, it would likely be viewed as hawkish, potentially driving USD/JPY back towards 140.00."

Overnight, Wall Street finally had the time to digest the Federal Reserve's first rate cut. With more easing to come, investors are wagering on continued U.S. economic growth, and better-than-expected jobless claims data added to the view that the labour market remained healthy.

Markets imply a 40% chance the Fed will cut by another 50 basis points in November and have 73 basis points priced in by year-end. Rates are seen at 2.85% by the end of 2025, which is now thought to be the Fed's estimate of neutral.

U.S. stock futures were slightly lower on Friday. The S&P 500 and Dow Jones Industrial Average surged to a record close on Thursday, while Nasdaq jumped 2.5%, spearheaded by tech shares. [.N]

In foreign exchange markets, the dollar was pinned near one-year lows against major currencies. The British pound held at $1.3278, having rallied 0.7% overnight to the highest since March 2022 as the Bank of England held rates steady.

Short-dated U.S. Treasuries held close to two-year highs. Two-year Treasury yields slipped 3 basis points on Friday but were flat for the week.

Commodities also held onto their weekly gains. Gold hovered near a record high at $2,592.17 an ounce and oil prices are set for their second straight week of gain.

Brent futures slipped 0.3% to $74.69 a barrel, but are still up 4.2% this week. [O/R]

(Reporting by Stella Qiu; Editing by Christopher Cushing and Jamie Freed)