SINGAPORE, Nov 4 (Reuters) - The yuan surged on Friday on speculation that China will relax its strict anti-COVID measures, while the U.S. dollar paused in its heady ascent while staying set for its best week in over a month with U.S. interest rates expected to go higher.
The offshore yuan jumped more than 1% in the Asia session to a one-week peak of 7.2441 per dollar, and last traded 7.2621.
Chinese markets received a broad boost from a Bloomberg News report that initial U.S. inspections of Chinese company audits had finished ahead of time. The report cited sources familiar with the inspection process, and raised hopes that U.S. authorities were satisfied.
But traders said the most potent boost to the yuan came from speculation that China could relax anti-COVID restrictions,which have been hobbling economic activity.
"The currency market is the most accessible barometer to digest China's risk sentiment without getting overly complicated," said Stephen Innes, managing partner at SPI Asset Management.
"CNH will tell you if investors are running hot or cold in China markets. And as is typically the case, this type of 'risk on' move indicated by the yuan will have a magnetic attraction across Asia markets."
Elsewhere, the dollar pulled back from an overnight surge that knocked the euro and the Aussie to their lowest in nearly two weeks.
The euro was up 0.29% at $0.9778, while the kiwi gained 0.68% to $0.5815.
The Australian dollar rose 0.86% to $0.6342, further buoyed by the positive sentiment on China, as the Aussie is often used as a liquid proxy for the yuan.
Sterling was up 0.52% at $1.1217, though that did little to erase its 2% slide overnight after a sobering assessment of Britain's growth outlook and a shift in tone from the Bank of England on rate expectations.
The pound was also headed for a weekly loss of more than 3%, the largest since September's market turmoil triggered by an economic plan that alarmed investors.
While the BoE raised interest rates by the most since 1989 on Thursday, it warned investors that the risk of Britain's longest recession in at least a century means borrowing costs are likely to rise less than they expect.
"It's been sort of coming for some time that the Bank of England is a reluctant hiker ... in the current environment," said Rodrigo Catril, a currency strategist at National Australia Bank (NAB), while cautioning that inflation was "still way too high."
Fed rate futures now point to a terminal rate of about 5.15% by mid-2023, after the Federal Reserve raised interest rates by three-quarters of a percentage point this week.
While investors initially cheered a signal that the central bank may be nearing an inflection point in its aggressive monetary policy tightening campaign, Fed Chair Jerome Powell was quick to dampen hopes, saying that it was "very premature" to discuss when the Fed might pause its increases.
"While peak U.S. yields are a necessary condition for a turn in USD, we would argue it is not sufficient. Even if the Fed pauses its hiking cycle early next year, USD still retains a yield advantage against most other currencies," said analysts at RBC.
Against a basket of currencies, the U.S. dollar index fell 0.37% to 112.55 in Asia trade on Friday, after hitting a near two-week peak of 113.15 overnight.
Nonetheless, it was on track for a weekly gain of close to 2% -- its largest since September.
Investors were turning their attention to key U.S. jobs data due later in the global day, with economists polled by Reuters expecting nonfarm payrolls to show an increase of 200,000 jobs in October.
"An upside surprise to the data would reinforce the Fed’s higher terminal rate posture and keep the U.S. dollar bid, but softer prints can weigh on dollar," said Christopher Wong, currency strategist at OCBC.
A higher peak in U.S. rates also spells more pain for the Japanese yen, which has been a victim of widening interest rate differentials as a result of the Bank of Japan's dovishness.
The yen was last 0.25% stronger at 147.89 per dollar, with recent moves to the currency relatively more subdued on concerns about further intervention from Japanese authorities.
Finance Minister Shunichi Suzuki said that Japan's currency interventions have been stealth operations in order to maximise the effects of its forays into the market, with the government having spent a record $43 billion supporting the yen last month.
Reporting by Rae Wee in Singapore and additional reporting by Winni Zhou in Shanghai; Editing by Kim Coghill, Ana Nicolaci da Costa and Simon Cameron-Moore