LONDON, Sept 16 (Askume) – The dollar weakened on Monday and the yen rose to its highest level in more than a year as market participants expected the Federal Reserve to cut interest rates sharply later this week.
USD/JPY fell to 139.58 on Friday, further down from the late December low of 140.285, which was last touched in July 2023.
The Federal Reserve meeting on September 17-18 is the highlight of this busy week, with the Bank of England and Bank of Japan also set to announce policy decisions on Thursday and Friday, respectively.
Following last month’s Federal Reserve speech and data release, markets remain uncertain about the extent of this week’s rate cuts and there is debate over whether the Fed will cut rates quickly enough to offset labor market weakness, or whether it will take a slower wait-and-see approach.
The futures market fully expects the Federal Reserve to cut interest rates by 25 basis points on Wednesday, and there is about a 60% chance that they will opt for a more substantial rate cut of 50 basis points. Last week the probability of a significant rate cut was about 15%.
“It all depends on the Fed and whether it’s a big 50 basis point rate cut or a smaller 25 basis point cut,” said Nordea chief economist Niels Christensen. “That’s why the dollar is weak everywhere.”
The U.S. dollar index, which measures the greenback against six of its peers, fell 0.3% to 100.69.
US Treasury yields are falling ahead of the much-anticipated Federal Reserve meeting, especially as the prospect of an aggressive Fed rate cut by half a percentage point has increased.
The benchmark 10-year Treasury yield has fallen 30 basis points in about two weeks. The two-year yield, which is more closely linked to monetary policy expectations, is at about 3.55%, down from about 3.94% two weeks ago.
Chris Weston, head of research at Australian online broker Pepperstone, said selling US dollars for yen is the best option for investors who want to take advantage of the fall in government bond yields.
“Although speculators are few and at lower levels, the trend is clearly consistent,” he said.
Investors are also paying attention to the Bank of Japan’s interest rate decision on Friday. The bank is expected to raise interest rates twice this year and is expected to keep its short-term policy interest rate target steady at 0.25%.
Bank of Japan board members have signaled a willingness to see interest rates rise, as the yen has been appreciating as the interest rate differential between Japan and other major currencies has narrowed and arbitrage trading that financed billions of dollars in yen has ended.
“We expect Japanese rates to rise and U.S. rates to fall, so the spread favors a stronger yen versus the dollar,” Nordea’s Christensen said.
Sterling rose 0.4% to $1.3170. The euro also rose 0.4% to $1.1114.
The European Central Bank cut interest rates by 25 basis points last week, but ECB President Christine LagardeThis dampened expectations for another cut in borrowing costs next month.
ECB Chief Economist Philip R. Ryan and Vice President Luis de Guindos spoke at the event on Monday.
The Bank of England is expected to keep its key interest rate unchanged at 5% on Thursday, after cutting it by 25 basis points in August.
Meanwhile, Bank of Canada Governor Tiff Macklem has opened the door to accelerating rate cuts , the Financial Times reported on Sunday . After maintaining its key policy rate at 5%, the highest level in more than two decades, the central bank has cut its key policy rate by 25 basis points three times since June.
The US dollar was little changed against the Canadian dollar and stood at 1.3579 Canadian dollars.
