Aussie jumps, yen slumps as rates play dominates in February

SINGAPORE (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 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 , 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, it is the best-performing G10 currency to date, as a domestic economy in rude health fuels expectations for a more hawkish Reserve Bank of Australia.

"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 as domestic politics complicates the rate outlook, despite BOJ Governor Kazuo Ueda signalling 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.

"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 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.

The dollar 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.

"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.