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Hong Kong - The dollar climbed against most emerging currencies Friday after Federal Reserve boss Janet Yellen said she expects a US interest rate hike by the year's end but worries over China's economy kept traders on edge.
Yellen's comments were the first since last Thursday when she rattled nerves by saying the Fed had held rates because of worries about the impact on the US economy of a growth crisis in China and other developing nations.
But while economists said the speech provided a little more clarity on the central bank's timetable for normalising monetary policy, the prospect of higher borrowing costs will dent investment opportunities, weighing on stocks.
The yen lost early gains to recede against the dollar and euro after data showed Japanese consumer prices fell in August for the first time in more than two years, fuelling expectations the country's central bank will widen its stimulus programme.
On Thursday, in a closely followed speech, Yellen said improvements in the US economy "will likely entail an initial increase in the federal funds rate later this year".
She added the bank would continue to monitor weaker activity overseas but the impact will probably not be "large enough to have a significant effect on the path for policy".
Her remarks were aimed at soothing global markets that tumbled in reaction to Yellen's statement soon after the bank's policy meeting last week, which raised questions about the US recovery.
"What we've heard from Janet Yellen has done a lot to settle the market," Kerry Craig, a Melbourne-based global strategist at JPMorgan Asset management, told Bloomberg TV.
The increased likelihood of a rate rise sent the dollar higher as investors look to shift out of emerging markets to find better and safer return in the United States.
South Korea's won lost 0.17%, the Malaysian ringgit was down 0.18%, the Indian rupee shed 0.26% and Singapore's dollar slipped 0.12%. However, the Indonesia rupiah edged up 0.08% although it is still sitting around 17-year lows.
The resources-reliant Australian dollar - already under pressure owing to China's weakness - also bounced back from morning losses to sit 0.10% higher.
"Yellen's words continue to support bets for a stronger dollar," said Jeon Seung Ji, a currency analyst at Samsung Futures in Seoul, told Bloomberg News.
The yen retreated after data showed prices slipped 0.1% in August for the first time since April 2013 - highlighting the job authorities have in ending years of deflation. It will also put fresh pressure on the Bank of Japan to ramp up its already huge stimulus programme.
Marcel Thieliant from Capital Economics speculated that the BoJ will announce more easing at its end of October meeting.
"A sluggish economic recovery and anaemic wage growth suggest that price pressures are unlikely to strengthen much further form here on," he said in a commentary.
The dollar rose in the afternoon to 120.50 yen from 129.29 yen in New York, while the euro was at 134.42 yen from 134.36 yen.
Traders seemed unmoved by Abe's pledge to refocus on his "Abenomics" growth project and try to boost the economy by 20% but offered no specific measures on how he would achieve that goal.
The weaker yen gave a lift to Japanese stock markets, with the benchmark Nikkei 225 bouncing from morning losses to end 1.76% higher.
However, ongoing worries about the sharp slowdown in China's economic growth continues to play on nerves as its leaders struggle to get to grips with the crisis.
Fears were fanned Wednesday by news that a gauge of factory activity in the country had hit a six-and-a-half-year low in September and indicated shrinkage.
Shanghai ended the day 1.60% lower as investors wind down for the beginning Thursday of a week-long holiday.
The index had spent most of the week in positive territory on hopes President Xi would sign a number of trade deals while on a state visit to the United States.
"The market is a bit into holiday mode and there's not much interest in trading stocks," said Wu Kan, a Shanghai-based fund manager at JK Life Insurance Co. "There's no good news for the market with the economy being weak."
In other markets Hong Kong closed 0.43% higher after a two-day losing run but Sydney closed 1.6% lower and Seoul lost 0.22%.
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