Dollar Strength Pushes Yen to Nine-Month Low Amid Fading Fed Cut Prospects

The U.S. dollar continued its rally on Tuesday, with the Japanese yen hitting levels not seen since mid-March, falling to 155.29 per dollar during early Asian trading. The sharp decline in the yen’s value reflects a fundamental shift in market expectations regarding Federal Reserve monetary policy, as traders reassess the likelihood of interest rate cuts in the near term.

Fed Rate Cut Odds Drop Dramatically

Market participants have significantly reduced their bets on a December 10 Fed rate cut, with current Fed funds futures pricing in only a 43% probability of a 25-basis-point reduction—a substantial pullback from 62% recorded just seven days prior. This swing in sentiment suggests investors are increasingly pricing in a scenario where the Federal Reserve maintains its current policy stance, at least in the immediate term.

According to ING analysts, even if the Fed decides to hold rates steady in December, such a pause may prove temporary, with future policy directions heavily dependent on incoming economic data, particularly labor market metrics. The anticipated September payroll figures, due Thursday, are positioned as a critical catalyst for market repricing.

Japan’s Currency Concerns Amid Rapid Depreciation

Japanese officials have grown increasingly vocal about the yen’s weakness. Finance Minister Satsuki Katayama flagged concerns during a press briefing, characterizing recent currency movements as “one-sided, rapid” and warning of potential economic headwinds stemming from the depreciation. Prime Minister Sanae Takaichi is slated to convene with Bank of Japan Governor Kazuo Ueda today to discuss the situation, highlighting the urgency with which Tokyo views the matter.

U.S. Labor Market Shows Signs of Fatigue

Federal Reserve officials highlighted emerging softness in the U.S. labor market on Monday, as firms signal mounting reluctance to expand headcount. Fed Vice Chair Philip Jefferson described the labor backdrop as “sluggish,” citing hesitancy among employers and hints of potential workforce reductions as businesses adapt to shifting economic conditions and heightened AI adoption.

Broader Market Fallout

As economic uncertainty intensified, sentiment deteriorated across U.S. equity markets, with all three major stock indexes posting losses. Bond yields moved in divergent directions, with the two-year Treasury slipping 0.2 basis points to 3.6039%, while the 10-year note edged up 0.6 basis points to 4.1366%.

In the currency complex, the euro remained unchanged at $1.1594, while sterling declined 0.1% to $1.3149, marking its third consecutive session of weakness. The Australian dollar weakened to $0.6493, and the New Zealand dollar held steady at $0.56535. The broad-based yen strength signals a recalibration of global risk positioning as the low probability of near-term U.S. rate cuts continues to fade from market consensus.