Dollar hits 8.5-month low vs yen

NEW YORK/LONDON: The US dollar fell on Friday to its lowest level since late December against the Japanese yen after media reports fueled once again the debate about a super-sized interest rate cut of 50 basis points (bps) at next week’s policy meeting.

Analysts said reports by the Wall Street Journal and Financial Times late on Thursday saying a 50-bp rate reduction is still an option, and comments from a former Fed official arguing for an outsized cut, caused a shift in market expectations.

The US rate futures market has priced in a 45 per cent chance of a 50-bp easing by the Fed at the conclusion of the September meeting on Wednesday, up from about 15 per cent early Thursday.

Futures traders have also factored in 117 bps of cuts for 2024, up from 107 bps in the previous session.

“The overall ambiguity surrounding the next Fed cut is really pressuring the US dollar,” Boris Kovacevic, global macro strategist, at Convera in Vienna, Austria, said.

“Going into the blackout period of the Fed, everyone expected a 25-bp cut, given that the last jobs report just came in one day before that blackout period. So the Fed didn't have enough time to prepare the market for a jumbo rate cut.”

Referencing the FT and the WSJ articles, Kovacevic noted that it will come down to how the Fed wants to be perceived by markets.

“If they want to be perceived as attending to the needs of the labor market, I think they go 50. But if they want to be seen as having the inflation mandate as a priority, they will go 25.”

In late morning trading, the dollar fell 0.7 per cent to 140.69 yen, after earlier dropping to 140.285, the lowest since late December. On the week, it fell 1.0 per cent.

The euro, meanwhile, rose 0.2 per cent versus the greenback to $1.1091

The European Central Bank cut interest rates by 25 bps but ECB President Christine Lagarde dampened expectations for another cut next month.

Gains in the euro have pushed the dollar index 0.2 per cent lower to 100.97. The dollar trimmed losses after data showed US consumer sentiment improved in September amid easing inflation.