Currency markets experienced subdued trading on Monday as investors awaited the Federal Reserve’s impending interest rate decision later this week. The Japanese yen remained near its highest levels for the year, trading flat at 140.86 yen to the dollar, as market activity was muted due to holidays in Japan, China, and South Korea.
The yen’s stability follows a 1.3% decline against the dollar last week, with trading volumes reduced due to the holiday closures. The Federal Reserve’s meeting on September 17-18 is the focal point of a busy week that also includes policy announcements from the Bank of England and the Bank of Japan.
Benchmark 10-year Treasury yields were stable at 3.65%, showing no change from Friday’s levels. Over the past two weeks, these yields have decreased by 30 basis points. Two-year Treasury yields, which are more sensitive to shifts in monetary policy expectations, were at 3.57%, down from around 3.94% two weeks ago.
Chris Weston, head of research at Australian online broker Pepperstone, noted that the decline in Treasury yields has prompted investors to sell the dollar in favor of the yen. He emphasized that this trend, driven by lower Treasury yields, aligns with the current market dynamics and suggested watching for further movements as the dollar-yen pair approaches its December lows.
Despite speculation about the Fed’s upcoming decision, a quarter-point reduction remains slightly more probable than a half-point cut, though the latter is still under consideration. Fed fund futures suggest a 52% chance of a 50-basis point cut at the September meeting, with futures pricing in a total of 125 basis points in rate cuts for 2024.
Attention also turns to the Bank of Japan, which is expected to keep its short-term policy rate target steady at 0.25% during its announcement on Friday. The narrowing interest rate differential between Japan and other major currencies has strengthened the yen, leading to the unwinding of yen-funded carry trades.
Political developments in Japan add another layer of complexity. The ruling Liberal Democratic Party is set to elect a new leader on September 27 to replace Prime Minister Fumio Kishida. Leading contender Sanae Takaichi has suggested that the Bank of Japan should avoid further interest rate hikes to support the country’s economic recovery.
In other currency movements, the British pound edged up 0.05% to $1.3132, although it remains below its recent highs. The euro increased by 0.11% to $1.1088. The dollar index, which measures the greenback against a basket of major currencies, was down 0.1% at 101.
The European Central Bank’s recent 25 basis point rate cut last week has led to tempered expectations for further reductions, with ECB President Christine Lagarde casting doubt on additional cuts next month. ECB Chief Economist Philip R. Lane and Vice President Luis de Guindos are scheduled to speak on Monday.
Meanwhile, Bank of Canada Governor Tiff Macklem hinted at the possibility of accelerating interest rate cuts. The Bank of Canada, which had maintained its key policy rate at a two-decade high of 5% for a year, has recently trimmed rates by a quarter point three times since June.
As markets brace for key central bank decisions this week, the focus remains on how these moves will impact currency valuations and global economic stability.
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