Dollar hits nine-month low versus yen as Fed debate reignites

The dollar fell on Friday (Sep 13) to its lowest level this year against the Japanese yen after media reports reignited the debate about an outsized Federal Reserve rate cut next week.

The US currency fell 1 per cent to 140.36 yen, the lowest since late December, and last traded 0.7 per cent lower at 140.87. The euro, pound and Swiss franc made gains against the dollar. US economic data this week appeared to support the case for a typical 25 basis point (bp) cut next week, with the measure of consumer price inflation that strips out volatile food and energy prices rising more than expected in August.

However, market analysts said reports by the Wall Street Journal and Financial Times saying a 50 basis point cut is still an option, and comments from a former Fed official arguing for an outsized cut, caused a shift in market expectations.

“A couple of articles were published in the Wall Street Journal and the FT suggesting that a 50 bp move was still in play, which has led markets to once again re-evaluate their expectations,” said Henry Allen, macro strategist at Deutsche Bank.

“That was something of a surprise to investors, who had been increasingly pricing in 25 bps, not least after the core CPI (inflation) print was a bit stronger than expected on Wednesday.”

Traders were assigning a roughly 40 per cent chance of a 50 bp cut by the Fed next Wednesday, up from around 25 per cent on Thursday and 15 per cent on Wednesday, according to money market pricing.

Former New York Federal Reserve President Bill Dudley said on Friday there was a strong case for a 50 bp cut, arguing rates were currently 150-200 basis points above the so-called neutral rate for the US economy, where policy is neither restrictive nor accommodative. “Why don’t you just get started?” he said.

The euro was last up 0.11 per cent at US$1.1086 after rising 0.57 per cent on Thursday after the European Central Bank cut interest rates by 25 bps, but ECB President Christine Lagarde dampened expectations for another cut next month.

Expectations that interest rates will be higher than previously expected tend to boost a currency by making fixed income assets in the country or region more attractive, and vice versa.

The euro “is eyeing US$1.11 again after the combined support of a not-dovish-enough European Central Bank and rising dovish bets on the Fed,” said Francesco Pesole, currency strategist at ING.

The dollar index, which tracks the currency against six peers, was 0.1 per cent lower at 101.06.

Sterling was little changed at US$1.3119, around its highest in a week. The Bank of England is expected to hold interest rates at 5 per cent next week after kicking off easing with a 25 basis point reduction in August.

The dollar fell 0.51 per cent against the Swiss franc, which like the yen is particularly sensitive to expectations about Fed policy and US bond yields.

Investors were also looking to the Bank of Japan’s interest rate decision next Friday, where it’s expected to keep rates steady at 0.25 per cent. BOJ board member Naoki Tamura said on Thursday the central bank must raise rates to at least 1 per cent as soon as the second half of the next fiscal year but added that it would likely raise rates slowly and in several stages. REUTERS