Dollar Surge Leaves Yen at Nine-Month Lows as Rate Cut Bets Fade Away

The Japanese yen has tumbled to levels not seen since early March, hitting 155.29 against the dollar in Tuesday’s Asian session. This marked depreciation reflects a broader shift in market expectations surrounding U.S. monetary policy, as investors have dramatically scaled back their bets on a Federal Reserve rate reduction scheduled for December 10.

The Shifting Rate Cut Narrative

Fed funds futures data tells a compelling story: the probability of a 25-basis-point cut has compressed to just 43%, a sharp reversal from the 62% odds traders were pricing in merely seven days earlier. This rapid fade in rate cut expectations has fundamentally altered currency dynamics, strengthening the greenback while pushing the yen to uncomfortable lows for Tokyo policymakers.

Upcoming employment figures due Thursday are poised to be a critical catalyst for the near term, potentially either reinforcing or challenging the current consensus on Fed policy.

Japan’s Policy Concerns Mount

Japan’s Finance Minister Satsuki Katayama has openly flagged the risks posed by “rapid, one-sided moves” in foreign exchange markets. The government’s concern stems from well-founded economic logic: unchecked yen weakness can distort import prices, strain purchasing power, and complicate fiscal planning.

A scheduled meeting between Prime Minister Sanae Takaichi and Bank of Japan Governor Kazuo Ueda is expected to address these pressures today, highlighting the tension between Tokyo’s preference for accommodative policies (which typically support yen depreciation) and the need to manage currency volatility.

U.S. Labor Market Sends Mixed Signals

The weakness in rate cut expectations is heavily influenced by mixed labor market signals. Fed Vice Chair Philip Jefferson characterized hiring conditions as “sluggish,” noting that employers have grown reluctant to expand payrolls amid policy uncertainty and AI-driven automation trends. ING analysts observed that even if the Fed pauses in December, “it is likely to be a temporary pause,” with future moves heavily contingent on employment data trajectories.

Broader Market Implications

The yen’s fall and shifting rate expectations have rippled across asset classes. All three major U.S. stock indexes retreated as investor sentiment weakened. Treasury yields adjusted accordingly: the two-year note dropped 0.2 basis points to 3.6039%, while the 10-year climbed 0.6 basis points to 4.1366%.

Currency movements extended beyond the yen-dollar pair. The euro held steady at $1.1594, the British pound dipped 0.1% to $1.3149 (marking its third consecutive decline), the Australian dollar settled at $0.6493, and the New Zealand dollar remained unchanged at $0.56535. These moves collectively suggest risk-off sentiment gaining traction across global markets.

The coming days will be crucial; as economic data flows in, market participants will reassess their Fed policy assumptions, likely determining the trajectory for both the yen and broader currency markets.