Dollar slides as Yen strengthens amid Fed rate cut speculation

Forex market shifts: The Dollar experienced a decline on Monday while the Yen surged to its highest level in over a year. This shift in the forex market came as investors grew more confident about the possibility of a rate cut by the Federal Reserve later this week.

The Dollar dropped to a low of 139.58 Yen, moving further away from its 140.285 low recorded at the end of December. This marks a level not seen since July 2023.

Key central bank meetings

The Federal Reserve's meeting on September 17-18 is anticipated to be a major event this week, alongside policy announcements from the Bank of England and the Bank of Japan on Thursday and Friday, respectively.

Recent speeches from Fed officials and economic data have led to speculation about the size of the upcoming rate cut, with the market debating whether the Fed will act decisively with a large cut or adopt a more cautious approach.

Fed rate cut bets

Futures markets are now fully pricing in a quarter-point cut by the Fed on Wednesday, with a 60 per cent probability of a more substantial 50 basis point cut. Just last week, the odds of a larger move were approximately 15 per cent.

Niels Christensen, Chief Analyst at Nordea, commented, "The market focus is on the Fed and whether it will opt for a significant 50 basis point cut or a smaller 25 basis point adjustment. This uncertainty is driving the softness in the Dollar ."

The Dollar index was down by 0.3 per cent, settling at 100.69. Treasury yields have been decreasing as the Fed meeting approaches, particularly due to expectations for a potential half-point rate cut.

The benchmark 10-year Treasury yields have fallen by 30 basis points in the past two weeks, while two-year yields have dropped to around 3.55 per cent, down from approximately 3.94 per cent two weeks ago.

Chris Weston, Head of Research at Pepperstone, noted that selling the Dollar for Yen has been a popular trade amongst investors betting on lower Treasury yields. "With speculators positioning for a decline, aligning with this trend seems advantageous," he said.

BOJ rate decision focus

Attention is also on the Bank of Japan's interest rate decision on Friday, where it is expected to maintain its short-term policy rate at 0.25 per cent, following two rate hikes earlier this year. The narrowing interest rate gap between Japan and other major currencies has supported the Yen and prompted the unwinding of Yen-funded carry trades.

Christensen from Nordea added, "The expectation of higher rates in Japan and lower rates in the US is contributing to a stronger Yen against the Dollar ."

The British Pound rose by 0.4 per cent to $1.3170, and the Euro also increased by 0.4 per cent to $1.1114. Last week, the European Central Bank reduced interest rates by 25 basis points, though ECB President Christine Lagarde tempered expectations for further reductions in the near term.

The Bank of England is expected to maintain its key interest rate at 5 per cent on Thursday, after an initial rate cut of 25 basis points in August. Meanwhile, the Bank of Canada Governor Tiff Macklem hinted at the possibility of accelerating rate cuts, following a series of reductions since June.

The US Dollar remained largely unchanged against the Canadian Dollar at C$1.3579.

(With Reuters Inputs)