Most Asian currencies and equities fell on Friday after surprisingly strong U.S. economic data made investors wary of interest rates staying higher for longer, hurting sentiment towards riskier Asian assets.

Data on Thursday showed U.S. business activity accelerated to the highest level in just over two years in May and manufacturers reported a surge in prices for a range of inputs, causing investors to dial back rate cut expectations.

"For the year, markets are just pricing in 35 basis points (bps) cut compared to 44 bps cut a week ago," said Christopher Wong, a FX strategist at OCBC.

Earlier this week, minutes from the Federal Reserve's latest meeting indicated willingness from some officials to consider a rate hike to rein in inflation.

The Malaysian ringgit declined 0.3% while the Thai baht slipped 0.2%. The South Korean won declined 0.5%. Equities in the Philippines fell as much as 1.1% before recovering slightly.

Taiwan stocks slipped 0.2%, a day after a tech-fuelled rally following Nvidia's quarterly results which helped the benchmark hit a record high.

Shares in China fell 0.9%, touching levels not seen since late April, after China's military started a second day of war games around Taiwan on Friday.

"The USD rate environment is undisputedly a key driver for sentiment in Asian markets," said Frances Cheung, a rates strategist at OCBC.

"As long as the risk of Fed pivoting back to tightening is low, Asian markets shall be able to focus on domestic and idiosyncratic factors. The overall sentiment appears to be one that investors are convinced that peak Fed hawkishness has passed," Cheung added.

Central banks in Asia such as Bank Indonesia and Bank of Korea kept interest rates unchanged this week, while the Philippine central bank hinted at cutting rates as early as August last week.

"Most Asian central banks shall be able to primarily focus on domestic factors when they decide on monetary policy, while currency valuation comes into play if there is a material impact on imported inflation," Cheung said.

Stocks in South Korea declined more than 1%, and logged their worst week in five. Malaysia's consumer prices rose slightly less than expected in April, data showed on Friday. Equities in the country retreated 0.7%.

HIGHLIGHTS:

** Japan's inflation slows further, keeping BOJ cautious on further rate hikes

** Chile central bank cuts rate by 50 basis points to 6.0%

** India's new government will be spoilt for choice with $25 bln extra in kitty

(Reporting by John Biju in Bengaluru; Editing by Stephen Coates and Varun H K)