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The dollar weakened on Friday, with the yen reaching its highest level of the year, as investors awaited next week’s Central bank meetings. The focus is on the Federal Reserve and the potential size of the interest rate cut expected.

While a rate cut by the Fed is highly probable next week, uncertainty surrounding whether it will be a 25 basis point cut or a 50 basis point cut has kept investors cautious and weighed on the dollar. Reports from the Financial Times and the Wall Street Journal suggesting that the Fed’s decision will be a close call have led traders to increase bets on a larger rate cut.

The possibility of a 50 basis point cut has been gaining traction, with markets currently pricing in a 45% chance of such a move. Former New York Federal Reserve President Bill Dudley has also made a case for a larger cut, citing the current Interest rates being significantly above the neutral rate for the U.S. economy.

The European Central bank recently lowered rates, but ECB President Christine Lagarde tempered expectations for further cuts next month. The euro strengthened as a result, holding on to its gains in early trading on Friday.

In addition to the Fed, the Bank of England and Bank of Japan are set to hold policy meetings next week. The shifting rate expectations have led to a decline in Treasury yields, with the benchmark 10-year yield falling in Asian trading hours on Friday.

The yen reached its highest level since December ahead of the BOJ meeting, where rates are expected to remain steady. Sterling also saw gains before the BoE meeting, where a rate hold is anticipated following a cut in August.

Overall, a mix of economic reports this week has clouded rate expectations, with some analysts foreseeing a gradual normalization cycle starting with 25 basis point cuts in the coming months. However, the risks of more aggressive easing are increasing, particularly if there are signs of weaker labor demand or increased layoffs.

In conclusion, the uncertainty surrounding Central bank decisions and economic data releases continue to impact currency markets, with investors closely watching for any clues on future monetary policy actions.

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