Will the Yen Face More Pressure? Fed's Rate Cut Expectations Collapse

The U.S. dollar’s strength is reshaping currency markets with dramatic consequences. Market pricing for Federal Reserve action has undergone a seismic shift—the probability of a 25-basis-point rate cut in December has plummeted to just 43%, down sharply from 62% a week prior. This reversal is the primary force pushing the Japanese yen to its lowest face value in over nine months, trading at 155.29 per dollar during Asian morning sessions on Tuesday.

What Changed in One Week?

The catalyst lies not in currency speculation but in labor market deterioration. Federal Reserve Vice Chair Philip Jefferson characterize the employment situation as “sluggish,” revealing corporate hesitancy around hiring despite persistent inflation concerns. Signs of potential job cuts are surfacing across sectors, particularly as artificial intelligence reshapes workforce demands. This shift has triggered a dramatic recalibration: if policymakers were betting on December rate relief just days ago, today’s economic signals suggest the Fed may opt to hold rates steady instead.

According to ING analysts, any December pause would likely prove temporary—future policy hinges entirely on employment data arriving Thursday and subsequent economic releases. The incoming September U.S. payroll figures will be a critical market mover.

Yen at Historic Lows: Japan’s Growing Alarm

Japan’s Finance Minister Satsuki Katayama publicly expressed alarm over “one-sided, rapid moves” in foreign exchange markets and their economic ramifications. The low face value of the yen poses risks despite historical associations with export competitiveness. Prime Minister Sanae Takaichi is scheduled to meet with Bank of Japan Governor Kazuo Ueda to coordinate responses.

The currency weakness reflects deeper anxieties: markets are pricing in a stronger dollar environment for longer than previously expected, a dynamic driven by U.S. employment resilience and hawkish Fed messaging.

Ripple Effects Across Markets

Risk sentiment deteriorated materially. All three major U.S. stock indexes declined, while Treasury yields compressed—the two-year fell 0.2 basis points to 3.6039% and the ten-year rose 0.6 basis points to 4.1366%. In foreign exchange, the euro held flat at $1.1594, while sterling lost 0.1% to $1.3149 for its third consecutive down day. The Australian dollar slipped to $0.6493.

The yen’s low face levels underscore a fundamental repricing: with Fed rate cuts off the table, capital flows favor higher U.S. yields, pressuring lower-yielding currencies. Thursday’s payroll data will determine whether this dynamic persists or reverses.