Dollar Strengthens as Yen Slides to Nine-Month Valley Amid Cooling Rate-Cut Expectations

The Japanese yen hit its lowest point in nine months, trading at 155.29 per dollar during early Asian trading Tuesday, as market participants reassess Federal Reserve policy expectations heading into December. The sharp depreciation signals a fundamental shift in investor positioning, with the U.S. currency gaining ground on fading bets that the Fed will lower rates next month.

Shifting Fed Rate Cut Outlook

Market sentiment around monetary policy has reversed dramatically in recent days. Fed funds futures now price in only a 43% probability of a 25-basis-point rate reduction, a stark drop from 62% just one week prior. This recalibration stems from persistent strength in the U.S. economy and mixed labor market signals that complicate the central bank’s decision-making calculus.

Philip Jefferson, Vice Chair of the Federal Reserve, characterized the labor market as “sluggish,” noting that companies are increasingly cautious about hiring. The anticipated September employment data, due Thursday, could cement expectations for a prolonged monetary holding pattern.

Policy Response and Market Turbulence

Japan’s Finance Minister Satsuki Katayama publicly expressed alarm at the yen’s “one-sided, rapid moves,” warning of potential economic headwinds from sustained depreciation. Prime Minister Sanae Takaichi has scheduled discussions with Bank of Japan Governor Kazuo Ueda to address currency stability concerns, though Takaichi has historically favored policies conducive to yen weakness.

ING analysts cautioned that “if the Fed holds in December, it is likely to be a temporary pause,” emphasizing that employment data and other economic indicators will remain critical to future policy direction.

Broader Market Implications

The shift in rate expectations rippled across global markets. U.S. equities declined across all three major indexes, while bond yields moved modestly. The two-year Treasury yield fell 0.2 basis points to 3.6039%, while the 10-year note edged up 0.6 basis points to 4.1366%.

Currency markets reflected the broader uncertainty: the euro held steady at $1.1594, the British pound dipped 0.1% to $1.3149 for its third consecutive session of losses, the Australian dollar weakened to $0.6493, and the New Zealand dollar remained near $0.56535.