US dollar hits 8.5-month low against yen as 50-bps Fed rate cut expectations back in play

By Gertrude Chavez-Dreyfuss and Harry Robertson

NEW YORK/LONDON (Reuters) - 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% chance of a 50-bp easing by the Fed at the conclusion of the September meeting on Wednesday, up from about 15% 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% to 140.69 yen, after earlier dropping to 140.285, the lowest since late December. On the week, it fell 1%.

The euro, meanwhile, rose 0.2% 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% 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 Bill 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% to $1.3147, around its highest in a week. The Bank of England is expected to hold interest rates at 5% next week after kicking off easing with a 25-bp reduction in August.

The dollar fell 0.4% 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%.

BOJ board member Naoki Tamura said on Thursday the central bank must raise rates to at least 1% 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% -0.40% 101.19 100.

index 88

Euro/Doll 1.109 1.1074 0.14% 0.47% $1.1102 $1.1

ar 071

Dollar/Ye 140.63 141.76 -0.78% -0.28% 141.86 140.

n 29

Euro/Yen 1.109​ 157.04 -0.68% 0.22% 157.09 155.

63

Dollar/Sw 0.8479 0.8511 -0.38% 0.75% 0.8511 0.84

iss 45

Sterling/ 1.3151 1.3126 0.19% 3.34% $1.3158 $1.3

Dollar 115​

Dollar/Ca 1.3578 1.3581 0% 2.45% 1.3595 1.35

nadian 66

Aussie/Do 0.6715 0.6723 -0.1% -1.5% $0.6733 $0.6

llar 693

Euro/Swis 0.9403 0.9425 -0.23% 1.26% 0.9427 0.93

s 71

Euro/Ster 0.8432 0.8438 -0.07% -2.72% 0.8452 0.84

ling 28

NZ 0.6166 0.6183 -0.27% -2.41% $0.6193 0.61

Dollar/Do 63

llar

Dollar/No 10.6419​ 10.7119 -0.65% 5% 10.7237 10.6

rway 323

Euro/Norw 11.8031 11.8618 -0.49% 5.16% 11.8777 11.7

ay 937

Dollar/Sw 10.1987 10.2821 -0.81% 1.31% 10.2979 10.1

eden 892

Euro/Swed 11.3114 11.3872 -0.67% 1.67% 11.4 11.3

en 03

(This story has been corrected to fix the first name of former NY Fed President to Bill Dudley in paragraph 15)

(Reporting by Gertrude Chavez-Dreyfuss in New York and Harry Robertson in London; Additional reporting by Ankur Banerjee in Singapore; Editing by Sonali Paul, Susan Fenton, William Maclean and Andrew Heavens)