US dollar hits 8-1/2-month low vs yen as 50-bp cut back in play

NEW YORK/LONDON :The U.S. 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 U.S. 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 U.S. 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 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 U.S. 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.
U.S. 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 All Dudley added to the 50-bp cut speculation on Friday, saying 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 U.S. economy, where policy is neither restrictive nor accommodative. “Why don’t you just get started?,” he said.
The euro “is eyeing $1.11 again after the combined support of a not-dovish-enough European Central Bank and rising dovish bets on the Fed,” Francesco Pesole, currency strategist at ING, said.
Sterling edged up 0.2 per cent to $1.3147, 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-bp reduction in August.
The dollar fell 0.4 per cent against the Swiss franc to 0.8480 francs.
Investors were also looking to the Bank of Japan’s interest rate decision next Friday, where it is 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.
Currency              
bid
prices at
13
September
03:02
p.m. GMT
Descripti RIC Last U.S. Pct YTD Pct High Low
on Close Change Bid Bid
Previous
Session
Dollar 100.96 101.16 -0.19 per cent -0.40 per cent 101.19 100.
index 88
Euro/Doll 1.109 1.1074 0.14 per cent 0.47 per cent $1.1102 $1.1
ar 071
Dollar/Ye 140.63 141.76 -0.78 per cent -0.28 per cent 141.86 140.
n 29
Euro/Yen 1.109​ 157.04 -0.68 per cent 0.22 per cent 157.09 155.
63
Dollar/Sw 0.8479 0.8511 -0.38 per cent 0.75 per cent 0.8511 0.84
iss 45
Sterling/ 1.3151 1.3126 0.19 per cent 3.34 per cent $1.3158 $1.3
Dollar 115​
Dollar/Ca 1.3578 1.3581 0 per cent 2.45 per cent 1.3595 1.35
nadian 66
Aussie/Do 0.6715 0.6723 -0.1 per cent -1.5 per cent $0.6733 $0.6
llar 693
Euro/Swis 0.9403 0.9425 -0.23 per cent 1.26 per cent 0.9427 0.93
s 71
Euro/Ster 0.8432 0.8438 -0.07 per cent -2.72 per cent 0.8452 0.84
ling 28
NZ 0.6166 0.6183 -0.27 per cent -2.41 per cent $0.6193 0.61
Dollar/Do 63
llar
Dollar/No 10.6419​ 10.7119 -0.65 per cent 5 per cent 10.7237 10.6
rway 323
Euro/Norw 11.8031 11.8618 -0.49 per cent 5.16 per cent 11.8777 11.7
ay 937
Dollar/Sw 10.1987 10.2821 -0.81 per cent 1.31 per cent 10.2979 10.1
eden 892
Euro/Swed 11.3114 11.3872 -0.67 per cent 1.67 per cent 11.4 11.3
en 03