The yen hit its highest level in a year as the dollar weakened, anticipating potential drastic measures from the Federal Reserve (Fed) in the United States. Investors are betting on an unexpected Fed decision, leading to market volatility.
Market gets edgy, treasury yields plummet
US Treasury yields are falling fast. Over the past two weeks, 10-year yields have fallen by 30 basis points. On Monday, two-year Treasury yields—more directly tied to Fed policies—dropped another 2.5 basis points, landing at 3.5509%, down from 3.94% two weeks ago. The US Dollar Index (DXY), which tracks the greenback against six major currencies, fell 0.29% to 100.73. Other currencies capitalized on the dollar's weakness: the British pound rose 0.64% to $1.3206, and the euro climbed 0.42%, reaching $1.1123. Chief market strategist at Bannockburn Global Forex, Marc Chandler, noted: [CITE_W_A: 'Most of this action is the result of speculation over the Fed's next move. The market was cool with a 25-basis-point hike, but now the idea of a 50-basis-point cut is fueling these swings.']
All eyes on the Bank of Japan
Investors are also keeping a close watch on the Bank of Japan (BoJ), which is set to announce its interest rate decision on Friday. The BoJ is expected to keep its short-term policy rate unchanged at 0.25%, but the narrowing gap between US and Japanese interest rates has pushed the yen higher. This has triggered billions of dollars in unwinding yen-funded carry trades. The bank has already raised rates twice this year, and some board members want to raise them even higher. Chandler remarked: [CITE_NA: 'The market is pricing in the likelihood of more BOJ moves down the road.'] Meanwhile, the European Central Bank (ECB) cut its interest rate by 25 basis points last week, but ECB President Christine Lagarde made it clear that another cut isn't coming anytime soon. ECB Governing Council member Peter Kazimir said the bank should wait until December before making another rate cut to avoid a policy mistake.
Is a soft landing coming?
The Fed's rate decision comes at a time when inflation has been steadily cooling. Inflation peaked at 9.1% in June 2022 but has since dropped to about 2.5% as of August, bringing it closer to the Fed's long-term target of 2%. The slowdown in inflation is partly due to improved supply chains, which had been disrupted by the pandemic and the Russia-Ukraine conflict. As these pressures eased, prices for goods dropped, and consumers are returning to pre-pandemic spending patterns, focusing more on services over goods. The unemployment rate stands at 3.6%, the lowest it’s been in over five decades. Job growth has been steady, with 43 straight months of employment gains. The economy is running steadily, with GDP growth averaging 2.9% since December 2020. For the third quarter of 2024, analysts expect growth to clock in around 2.5%. Mortgage rates peaked at 7.2% in May 2024 but have since come down to about 6.2%, giving homebuyers some relief. The drop in mortgage rates has increased purchasing power for buyers by about $70,000 for the same monthly payment compared to last year. However, oil prices are heating up again: Hurricane Francine disrupted production in the Gulf of Mexico, driving oil prices up by 2% as of September 16. If this trend continues, consumers could feel the pinch at the pump, although gasoline prices in many states are below $3 per gallon, offering a bit of relief to drivers despite the spike in oil prices. Consumer confidence remains high, with spending staying steady.
The yen is showing significant gains as the dollar weakens in anticipation of the Fed's decision. Investors eagerly await further moves from both the Fed and the Bank of Japan, impacting global financial markets.
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