The US dollar fell below the key psychological level of 140 against the Japanese yen on Monday, reaching its lowest level in nearly nine months. During the European session, it fell to 139.58 at one point, after multiple media reports suggested that the Federal Reserve may cut interest rates by 50 basis points this week.
Analysts say that multiple media reports suggest that a 50 basis point rate cut is still an option, while former New York Fed Chairman Dudley also advocated for a significant rate cut, leading to a shift in market expectations.
The US interest rate futures market reflects a 51% chance of the central bank cutting interest rates by 50 basis points at this week's policy meeting, much higher than the approximately 15% seen earlier last week.
Brad Bechtel, the head of foreign exchange at Jefferies, stated that media reports have introduced the possibility of a 50 basis point rate cut to the market after new inflation data reinforced expectations of a 25 basis point cut by the Federal Reserve. Due to changes in market expectations, investors are adjusting their trading positions to accommodate a possible 50 basis point rate cut.
As investors expect the interest rate differential between the United States and Japan to further narrow, the Japanese yen has been the best performing G10 currency of the season, rising nearly 15%.
The Federal Reserve is almost certain to lower US borrowing costs this week, with the only issue being the reduction. Japan is expected to remain inactive on Friday after raising interest rates twice this year.
Chandresh Jain, Asia interest rate and forex strategist at BNP Paribas, said, "All fluctuations now stem from interest rates, and the market is digesting the prospect of further interest rate cuts by the Federal Reserve and the Bank of Japan
Jain expects the yen to continue to appreciate next year, but warns of "considerable risks" including the outcome of the US election and the risk of tariff hikes.
He added that foreign financial institutions may also be forced to sell some of their investment portfolios to cope with the liquidation of yen arbitrage trading, but we have not yet seen a complete collapse of arbitrage trading.
Although the Bank of Japan may not change its borrowing costs this week, most economists expect the central bank to increase borrowing costs again in December. The Bank of Japan raised its policy interest rate to 0.25% on July 31, causing global market turbulence in early August and impacting assets such as currency, bonds, and stocks.
Bank of Japan reviewer Naoki Tamura sent a strong hawkish signal to the outside world last Thursday: the Bank of Japan's future interest rate hikes may be greater than many economists expected. He pointed out that Japan's neutral policy interest rate is 1% or higher, and the Bank of Japan may have to raise interest rates quickly.
In addition, Japan's nationwide holiday on Monday was also one reason for the rise in the yen. Ryota Abe, Asia Pacific economist at Sumitomo Mitsui Banking Corporation, warned that holiday "speculators" took advantage of the opportunity of light trading, which could easily trigger significant market volatility.
However, he stated that the Japanese yen exchange rate may reach 135 yen per US dollar by the end of this year, the highest level since May last year& amp;quot; The US dollar is bound to fall against the Japanese yen in the near future, accompanied by some drastic fluctuations& amp;quot;