Greenback drops to near 9-month low versus yen amid talk of larger Fed rate cut

THE US dollar fell on Friday (Sep 13) to its lowest level in nearly nine months against the Japanese yen after media reports once again fuelled speculation the Federal Reserve could deliver a super-sized 50-basis-point (bp) interest rate cut at its coming 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.

In late afternoon trading, the dollar was down 0.66 per cent to 140.855 yen, after earlier dropping to 140.285, its lowest level since Dec 28. On the week, it fell 1 per cent.

The euro, meanwhile, rose 0.08 per cent versus the greenback to US$1.1083. The European Central Bank cut interest rates by 25 bps on Thursday, but ECB President Christine Lagarde dampened expectations for another reduction in borrowing costs next month.

Gains in the euro have pushed the dollar index 0.08 per cent lower to 101.08.

“That increase in probabilities of potentially more dovish Fed policy drove the dollar lower and pushed a lot of those other currencies higher, said John Velis, FX and macro strategist at BNY Mellon in Boston.

The dollar trimmed losses after data showed US consumer sentiment improved in September amid easing inflation.

The University of Michigan’s preliminary reading on the overall index of consumer sentiment came in at 69.0 this month, compared with a final reading of 67.9 in August. Economists polled by Reuters had forecast a preliminary reading of 68.5.

US economic data this week appeared to support the case for a typical 25-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.

But former New York Fed President Bill Dudley on Friday added to the speculation about a 50-bp Fed rate cut, saying there was a strong case for such a move and that 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 “is eyeing US$1.11 again after the combined support of a not-dovish-enough ECB and rising dovish bets on the Fed,” said Francesco Pesole, a currency strategist at ING.

Sterling edged slightly lower by 0.01 per cent to US$1.31235, weakening after reaching near its highest level in a week. The Bank of England is expected to hold its key interest rate at 5 per cent after kicking off its easing with a 25-bp reduction in August.

The dollar fell 0.38per cent against the Swiss franc to 0.84780 francs.

Investors were also looking to the Bank of Japan’s interest rate decision on the coming Friday, when it is expected to keep its short-term policy rate target steady at 0.25 per cent.

BOJ board member Naoki Tamura said on Thursday the central bank must raise rates to at least 1per cent as soon as the second half of the next fiscal year, but added that it would likely do so slowly and in several stages. “The BOJ is perceived to be going in the different direction than the Fed – in 180-degree opposite direction,” Velis said, adding that whether and when the BOJ raises rates remains an open question. REUTERS