US Dollar Forecast: USD/JPY Falls to Nine-Month Low Amid Fed Rate Cut Speculation

U.S. Dollar Slips Amid Renewed Fed Rate Cut Debate

The U.S. dollar index (DXY) traded lower on Friday, as sellers pushed it below a key pivot point at 101.225, signaling potential further downside toward long-term support at 100.617. The index has faced consistent selling pressure after failing to overcome resistance at 102.040, as market focus shifted to expectations around next week’s Federal Reserve interest rate decision.

At 13:40 GMT, the U.S. Dollar Index (DXY) is trading 100.947, down 0.288 or -0.28%.

Dollar Hits Nine-Month Low Against Yen

The dollar dropped sharply against the Japanese yen, falling 0.8% to 140.645, its lowest since December 2023. Traders reacted to reports that reignited the debate over whether the Fed might implement a 50 basis point (bps) rate cut at its next meeting. This surprised investors, who had largely priced in a more modest 25 bps cut following stronger-than-expected U.S. core inflation data earlier this week.

These reports, from media outlets including The Wall Street Journal and Financial Times, indicated that a larger cut could still be on the table. A shift in sentiment followed comments from former New York Federal Reserve President Bill Dudley, who argued for a 50 bps cut, citing that current rates are far above the neutral level.

Euro and Sterling Make Gains

The euro also benefited from the dollar’s weakness, climbing 0.15% to $1.1095. The European Central Bank’s (ECB) recent 25 bps rate cut, coupled with remarks from ECB President Christine Lagarde downplaying further immediate cuts, lent support to the currency. ING currency strategist Francesco Pesole noted that dovish Fed expectations paired with the ECB’s stance pushed the euro toward the $1.11 mark.

Similarly, the British pound rose 0.15% to $1.3146. Traders are now anticipating the Bank of England to maintain its interest rate at 5% following its August rate cut.

U.S. Treasury Yields Decline

U.S. Treasury yields slipped as the market assessed the impact of potential Fed actions. The 2-year Treasury yield fell nearly 6 bps to 3.591%, while the 10-year yield decreased 3 bps to 3.649%. The drop in yields reflects growing investor expectations of a more aggressive Fed rate cut.

CME Group’s FedWatch tool showed traders assigning a 41% probability of a 50 bps cut, up from just 15% earlier in the week.

Market Forecast

The U.S. dollar is likely to remain under pressure in the near term, particularly against the yen and euro, as traders recalibrate expectations around next week’s Fed decision.

If a 50 bps rate cut materializes, the dollar could face further declines, potentially testing the key support level at 100.617. However, if the Fed sticks to a 25 bps cut, the market may stabilize, although the broader sentiment remains bearish given ongoing concerns about U.S. inflation and economic growth.