Dollar Surge Cools Rate-Cut Optimism, Yen Slides to Nine-Month Trough

The Japanese yen tumbled to its weakest level in nine months, sliding to 155.29 against the dollar as markets reassess Federal Reserve policy expectations. The currency’s fade from earlier strength reflects a broader dollar rally, fueled by cooling bets that the Fed will implement interest rate cuts at its December 10 meeting.

Shifting Market Expectations on Fed Action

A week ago, traders priced in a 62% probability of a 25-basis-point rate reduction from the Federal Reserve. That conviction has evaporated—current Fed funds futures now suggest only a 43% likelihood of such a move. This dramatic shift stems from persistent concerns about economic resilience, particularly as the U.S. labor market shows signs of weakening.

The anticipated release of September payroll data on Thursday looms as a critical market event. Employment figures will serve as a key barometer for Fed policymakers, potentially determining whether December brings a policy hold or further rate cuts down the line.

Japan’s Currency Crisis and Policy Response

The yen’s nine-month low has triggered alarm bells in Tokyo. Finance Minister Satsuki Katayama warned during a press briefing of “one-sided, rapid moves” in forex markets and their damaging effects on economic stability. The government’s concern is understandable—sustained currency weakness complicates import costs and corporate planning.

Prime Minister Sanae Takaichi is slated to meet with Bank of Japan Governor Kazuo Ueda today to discuss the currency situation. The timing highlights the tension between different policy objectives: while Takaichi favors expansionary measures that historically support a weaker yen, rapid depreciation remains an economic headwind.

U.S. Labor Market Weakness Drives Sentiment Shift

Federal Reserve officials acknowledged mounting concerns over employment dynamics on Monday. Vice Chair Philip Jefferson characterized the labor market as “sluggish,” noting that companies are becoming more cautious about hiring amid policy uncertainty and the accelerating adoption of artificial intelligence across industries.

ING analysts cautioned that “if the Fed holds in December, it is likely to be a temporary pause,” signaling that future rate cuts could still materialize if economic data continues to deteriorate.

Market Ripple Effects Across Assets

The combination of fading rate-cut expectations and labor market doubts sent shockwaves through global markets. All three major U.S. stock indices closed lower, reflecting deteriorating investor appetite for equities in a higher-for-longer rate environment.

Bond yields reflected mixed signals: the two-year Treasury fell 0.2 basis points to 3.6039%, while the 10-year climbed 0.6 basis points to 4.1366%, suggesting investors remain uncertain about the economic trajectory.

Across currency markets, the euro remained anchored at $1.1594, while the British pound retreated 0.1% to $1.3149 for its third consecutive session of losses. The Australian dollar dropped to $0.6493, and the New Zealand dollar held steady near $0.56535.

The yen’s nine-month low underscores the stakes of the Fed’s December decision—the stakes for currency stability and global growth hinge on whether U.S. monetary policy continues its current restrictive posture.