The US dollar hit a more than one-year low against the yen as markets eased aggressive Fed rate cuts

By Chibuike Oguh and Samuel Indike

NEW YORK/LONDON (Reuters) – The U.S. dollar fell to a more than one-year low against the yen on Monday, as expectations rose that the Federal Reserve could deliver a supersize cut in interest rates later this week.

The Fed was widely expected to announce at least a 25-basis-point cut in interest rates at the conclusion of its September policy meeting on Wednesday.

But reports in the Wall Street Journal and Financial Times last week fueled speculation among traders that the central bank could deliver a more aggressive 50 bp cut.

Futures markets are pricing in a 61% chance of a 50 bp cut, up from about 15% last week.

“There's really a story today and that's a continuation of what we saw last week: After the CPI, the market was comfortable with a 25 basis point rate hike but many people suspect the Fed planted a story to pull back 50 basis points. Table ,” said Mark Chandler, chief market strategist at Bancburn Global Forex in New York.

“The markets have responded accordingly. And in fact, they're going to adjust.”

The dollar traded as low as 139.58 yen in Asia hours, the lowest since July 2023. It was last down 0.10% at 140.690 yen.

The dollar index, which measures the currency against six other currencies including the euro, yen and pound, was down 0.29% at 100.73.

“I think part of it might be because China, Japan and South Korea go on vacation that some of the prices are exaggerated,” Chandler added.

US Treasury yields have been falling in the run-up to the highly anticipated Fed meeting, especially as odds stack up for a half-point rate cut.

The benchmark 10-year yield fell 30 basis points in nearly two weeks. The two-year yield, more closely linked to expectations of monetary policy, fell 2.5 basis points to 3.5509% and was down from around 3.94% two weeks ago.

Investors are also looking ahead to the Bank of Japan's interest rate decision on Friday, when it is expected to keep its short-term policy rate target steady at 0.25%, having already raised rates twice this year.

BOJ board members have indicated they are keen to see higher rates, and the narrowing gap between rates in Japan and other major currencies has boosted the yen and left billions of dollars worth of yen-funded carry trades intact.

Sterling rose 0.64% to $1.3206 and the euro was up 0.42% to $1.1123.

The European Central Bank cut interest rates by 25 bps last week, but ECB President Christine Lagarde downplayed expectations of a further cut in borrowing costs next month.

ECB Governing Council member Peter Kazmir said on Monday that the ECB must wait until December before cutting interest rates so that it does not make the policy mistake of easing too quickly.

The Bank of England is expected to hold its key interest rate at 5% on Thursday, after kicking off its easing with a 25-bp cut in August. Futures markets priced in a roughly 35.9% chance of a quarter-point rate cut on Thursday, versus a 20% chance on Friday.

Currency bid price at 16 September 06:09

pm GMT

Description RIC Last US Close Previous Session Pct Change YTD Pct High Bid Low Bid

Dollar Index 100.73 101.02 -0.28% -0.63% 101.01 100.58

EUR/USD 1.1123 1.1076 0.43% 0.77% $1.1138 $1.1077

Dollar/Yen 140.65 140.87 -0.13% -0.26% 140.865 139.64

EUR/YEN 1.1123 155.97 0.3% 0.52% 156.67 155.16

Dollar/Swiss 0.845 0.8489 -0.49% 0.37% 0.8487 0.8436

Sterling/Dollar 1.3207 1.3125 0.65% 3.81% $1.3214 $1.3126

Dollar/Canadian 1.3588 1.3586 0.02% 2.51% 1.3608 1.3568

Aussie/Dollar 0.6743 0.6705 0.6% -1.08% $0.6749 $0.67

Euro/Swiss 0.9398 0.94 -0.02% 1.21% 0.9407 0.9384

EUR/Sterling 0.842 0.8438 -0.21% -2.86% 0.8443 0.8421

NZ Dollar / Dollar 0.6189 0.6159 0.5% -2.05% $0.6199 0.6155

Dollar/Norway 10.6053 10.634 -0.27% 4.64% 10.6423 10.579

Euro/Norway 11.7967 11.7914 0.04% 5.1% 11.816 11.7721

Dollar/Sweden 10.193 10.2097 -0.16% 1.25% 10.2405 10.1654

EUR/Sweden 11.3391 11.3172 0.19% 1.92% 11.3521 11.306

(Reporting by Chibuike Oguh in New York and Vidya Ranganathan and Samuel Indike in London; Editing by Kirsten Donovan and Aurora Ellis)