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Chinese shares drop, yuan hits 16-month highs

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China unexpectedly holds rates steady

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BOJ stands pat on rates, as widely expected

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Focus on Ueda briefing at 0630 GMT

(Updates prices as of 0530 GMT, adds European stock futures)

By Stella Qiu

SYDNEY, Sept 20 (Reuters) - Asian shares extended their

rally on Friday, bathing in the afterglow of an outsized

interest U.S. rate cut, while the yen edged higher as the Bank

of Japan held rates steady and stayed upbeat on the economy.

European sharemarkets are, however, set for a lower open,

with EUROSTOXX 50 futures slipping 0.3% and FTSE

futures falling 0.5%. Wall Street futures were also

slightly lower, after the S&P 500 surged to a record close on

Thursday.

In China, the central bank kept its benchmark lending

rates on hold, countering expectations for a move lower. Chinese

shares were an outlier in the region, with blue chips

down 0.5%. The onshore yuan strengthened to the

highest in nearly 16 months, leading to intervention by state

banks to prevent it from appreciating too fast.

MSCI's broadest index of Asia-Pacific shares outside Japan

rose 0.6% to the highest in two months, tracking

overnight gains on Wall Street. The index was headed for a

weekly gain of 2.4%.

The Nikkei rose 1.5% and was up 3.1% for the week.

In a short statement, the BOJ kept its short-term rate

steady at 0.25% on Friday as widely expected, but upgraded its

view on consumption. Notably, it mentioned the exchange rate was

more likely to affect prices than in the past.

The yen has rallied 14% from its low in early July but

its ascent has met some resistance at the key 140 per dollar

level. It was last up 0.3% at 142.21 per dollar, but still down

1% on the week even in the face of broad dollar weakness.

Data released on Friday showed Japan's core inflation

accelerated for a fourth consecutive month, reinforcing the case

for further policy tightening.

"The yen has become stronger and the market has not

completely settled down, so I think it is appropriate to leave

rates unchanged for now," said Kazutaka Maeda, an economist at

Meiji Yasuda Research Institute.

"The need for hikes as a measure to counter the weak yen has

somewhat decreased. Rather, the BOJ will look at wages and

prices and make adjustments in a way that will maintain a

virtuous cycle of wages and prices."

Investors will now focus on any hints from Governor Kazuo

Ueda on the timing and pace of further hikes at the post-meeting

press conference at 0630 GMT.

Overnight, Wall Street finally had the time to digest the

Federal Reserve's first rate cut. With more easing to come,

investors are wagering on continued U.S. economic growth and

better-than-expected jobless claims data added to the view that

the labour market remained healthy.

Markets imply a 40% chance the Fed will cut by another 50

basis points in November and have 73 basis points priced in by

year-end. Rates are seen at 2.85% by the end of 2025, which is

now thought to be the Fed's estimate of neutral.

In foreign exchange markets, the dollar was pinned near

one-year lows against major currencies. The British pound

was buoyant at $1.3297, having rallied 0.7% overnight

to the highest since March 2022 as the Bank of England held

rates steady.

Short-dated U.S. Treasuries held close to two-year highs.

Two-year Treasury yields slipped 3 basis points to

3.57% on Friday but were up 3 bps for the week.

Commodities also held onto their weekly gains. Gold

hovered near a record high at $2,592.67 an ounce and oil prices

are set for their second straight week of gain.

Brent futures slipped 0.3% to $74.67 a barrel, but

are still up 4.2% this week.