MUMBAI, Sept 13 (Reuters) - The Indian rupee strengthened on Friday as Asian currencies benefited from the weakness in the U.S. dollar as the odds of a outsized Federal Reserve rate cut next week rose after media reports said the decision is likely to be a close call.

The rupee closed at 83.8875 against the U.S. dollar, up from its close at 83.9650 in the previous session.

The currency strengthened nearly 0.1% week-on-week, its best weekly performance since the week ended June 25.

The dollar index dipped below the 101 handle on Friday and was down 0.2% on the day, while the Korean won and the Malaysian ringgit led gains among Asian currencies.

Broad-based interbank dollar offers helped the rupee on Friday, but 83.85 continues to be a strong resistance level for the currency, a foreign exchange trader at a state-run bank said.

The chances of a 50-basis point rate cut by the Fed rose to 43%, up from 14% a day earlier, which drove U.S. bond yields lower.

The odds rose after reports from the Wall Street Journal and Financial Times said an outsized rate reduction is still an option.

Dollar-rupee forward premiums benefited from the decline, with the one-year implied yield rising 5 bps to 2.28%, its highest level in 16 months.

"Unless the Fed surprises with a hawkish cut, we think even a dovish 25bp move (i.e., signalling large easing and perhaps 50bp cuts ahead) can prevent a sustainable dollar recovery," ING Bank said in a note.

Investors will also keep an eye on the Bank of Japan's (BOJ)interest rate decision next Friday, where it's expected to keep rates steady at 0.25%.

The BOJ's rate hike in July had sparked a rally in the yen, leading to an unwinding of global carry trades, sparking volatility across financial markets.

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https://www.reuters.com/markets/currencies/rupee-ends-higher-logs-strongest-weekly-rise-since-late-june-2024-09-13/