On Monday, the yen rose to its highest level in almost a year while the dollar declined as market players began to anticipate an excessive rate decrease by the Federal Reserve later this week.

The dollar hit a low of 139.58 yen, further declining from Friday’s end-of-year low of 140.285 to levels last seen in July 2023.

The highlight of a busy week for the Fed is its meeting from September 17–18. On Thursday and Friday, respectively, the Bank of England and the Bank of Japan will announce their policy choices.

Markets have been adjusting the odds on the magnitude of this week’s rate decrease and debating whether the Fed will halt downturn in the labour market due to Fed speakers and data releases over the previous month.

On Wednesday, futures markets completely priced a quarter-point reduction from the Fed, with a 60% probability that they would choose to go for a more significant 50 basis point change. The likelihood of a bigger move was 15% last week.

According to Nordea Chief Analyst Niels Christensen, “it’s all about the Fed and the question about whether it will be a big 50 basis point cut or a smaller 25 basis one.” “For this reason, the dollar is weaker overall.”

The dollar index, which compares the value of the currency to six other currencies, fell 0.3% to 100.69.

In the lead-up to the much awaited Fed meeting, Treasury rates have been declining, especially since the likelihood of the Fed acting aggressively with a half-point rate drop is increasing.

Standardisation In roughly two weeks, 10-year rates have dropped 30 basis points. Two-year yields were about 3.55%, down from about 3.94% two weeks ago. Two-year yields are more directly correlated with expectations for monetary policy.

According to Chris Weston, head of research at Australian online broker Pepperstone, selling the dollar for yen has proven to be the most profitable trade for investors hoping to profit from the decline in Treasury yields.

He stated, “This trend is definitely one to align with, even though speculators are short and riding this lower.”

Investors will also be watching the Bank of Japan’s interest rate announcement on Friday. After raising rates twice already this year, it is anticipated that the bank will maintain its short-term policy rate goal at 0.25%.

The BOJ board members have expressed their desire for higher interest rates, and the yen has risen in response to the closing interest rate differential between Japan and other major currencies, which has unwound carry trades worth billions of dollars.

According to Christensen of Nordea, “we are expecting higher rates in Japan and lower rates in the U.S., so the interest rate differential is favouring a stronger yen against the dollar.”

Sterling

Last week, the European Central Bank lowered interest rates by 25 basis points; nevertheless, ECB President Christine Lagarde did not raise expectations for further lower borrowing costs the following month.

Vice President Luis de Guindos and Chief Economist Philip R. Lane of the European Central Bank will talk on Monday.

Following a 25-bp drop in August to begin its easing, the Bank of England is anticipated to maintain its benchmark interest rate at 5% on Thursday.

As for the Bank of Canada Governor Tiff Macklem, the Financial Times said on Sunday that he has given the go-ahead to accelerate interest rate reductions. The Bank of Canada has lowered its key policy rate by a quarter point three times in a row since June after maintaining it at 5%, a level that is more than two decades high, for a year.

The US dollar remained relatively stable at C$1.3579 versus its Canadian equivalent.