US Dollar Weakens to Near 9-Month Low vs Yen on Larger Fed Rate Cut Expectations.
After media reports once again fueled speculation that the Federal Reserve could deliver a super-sized 50-basis-point interest rate cut at its policy meeting next week, the U.S. dollar fell on Friday to its lowest level in nearly nine months against the Japanese yen.
According to analysts, the market’s expectations were altered by reports from the Wall Street Journal and Financial Times late on Thursday, which indicated that a 50-bp rate reduction was still a viable option, as well as comments from a former Federal Reserve official advocating for an excessive reduction.
The U.S. rate futures market has increased the probability of a 50-bp easing by the Fed to 51% at the conclusion of its two-day meeting on Wednesday, from approximately 15% to 51% as of early Thursday. Futures traders have also accounted for 117 basis points of reductions in 2024, which is an increase from the 107 basis points that were accounted for in the previous session.
Brad Bechtel, global head of FX at Jefferies in New York, stated that the market was reintroduced to the possibility of a 50-bp reduction via media reports, following the confirmation of expectations for a 25-bp cut by the Fed by new inflation data. “So you’re just seeing a little bit of an unwinding of those positions that were looking for 25 basis points.”
The dollar experienced a 0.66% decline to 140.855 yen during late afternoon trading, following its previous decline to 140.285, its lowest level since December 28. It experienced a 1% decline over the course of the week.
In contrast, the euro appreciated by 0.08% against the dollar, reaching $1.1083.
On Thursday, the European Central Bank decreased interest rates by 25 basis points. However, ECB President Christine Lagarde has tempered anticipations for an additional decrease in borrowing costs next month. The dollar index has fallen by 0.08% to 101.08 as a result of the euro’s gains.
John Velis, FX and macro strategist at BNY in Boston, stated that the dollar was depreciated and a number of other currencies were driven higher as a result of the rise in the likelihood of a more dovish Fed policy.
After data indicated that U.S. consumer sentiment improved in September amid decreasing inflation, the dollar experienced a decline in value.
This month, the preliminary reading of the aggregate index of consumer sentiment from the University of Michigan was 69.0, up from a final reading of 67.9 in August. A preliminary reading of 68.5 was anticipated by economists.
The case for a typical 25-bp cut next week was seemingly bolstered by U.S. economic data this week. The measure of consumer price inflation, which excludes volatile food and energy prices, rose more than anticipated in August.
However, former New York Fed President Bill Dudley on Friday fueled the rumors of a 50-bp Fed rate cut, asserting that there was a compelling argument for such a change and that rates were currently 150-200 basis points above the so-called neutral rate for the U.S. economy, which is characterized by a policy that is neither restrictive nor accommodative. “Why don’t you just get started?,” he responded.
Francesco Pesole, a currency strategist at ING, stated that the euro is once again aiming for $1.11 due to the combined support of a European Central Bank that is not sufficiently dovish and the increasing number of dovish wagers on the Federal Reserve.
After reaching its greatest level in nearly a week, sterling experienced a slight decline of 0.01% to $1.31235. After commencing its easing process with a 25-bp reduction in August, the Bank of England is anticipated to maintain its key interest rate at 5% next week.
In comparison to the Swiss franc, the dollar dropped by 0.38% to 0.84780 francs.
Investors were also anticipating the Bank of Japan’s interest rate decision on Friday, which is anticipated to maintain its short-term policy rate objective of 0.25%.
Naoki Tamura, a member of the BOJ board, stated on Thursday that the central bank must increase rates to at least 1% by the second half of the upcoming fiscal year. However, he also anticipated that the increase would be gradual and implemented in stages.
Velis stated that the BOJ is perceived to be moving in a 180-degree opposite direction from the Fed, and that the timing and extent of the BOJ’s rate hikes are still uncertain.
