The US dollar fell slightly as investors raised expectations for a rate cut by the Federal Reserve this month. This was due to weak US economic data and persistently low inflationary pressures. The market probability of a quarter-point cut at the December 9-10 meeting jumped to almost 88%, compared to around 40% a week ago.
At the same time, market attention was also focused on the potential for a change in Fed leadership after President Donald Trump said he had selected a candidate for a new chairman, with Kevin Hassett reportedly the frontrunner. Market observers believe the selection of a dovish figure could further boost expectations for aggressive rate cuts next year.
Powell’s statement is not expected to provide any new clues as the Fed is in a pre-meeting blackout. The dollar index fell 0.2% to 99.25, in line with the erosion of confidence in the direction of US short-term monetary policy.
The Japanese yen strengthened after BOJ Governor Kazuo Ueda signaled that policymakers would consider a rate hike at the December meeting, a move interpreted as hawkish by investors. An additional factor was signs that the normally dovish Prime Minister Takaichi was not ruling out a rate hike.
Market moves were also supported by a rise in Japanese government bond yields, while the euro edged up 0.3% and the pound remained steady. Markets now see both the Fed and BOJ at a key policy crossroads that could potentially set the direction of global FX heading into the end of the year.
