Rate Cut Bets Fade as Dollar Strength Pressures Yen to Nine-Month Trough

The Japanese yen experienced a sharp decline during Asian trading Tuesday, sliding to 155.29 per dollar—its weakest level in over nine months. This pullback underscores a broader shift in market sentiment regarding Federal Reserve monetary policy, as expectations for a December 10 rate cut have substantially diminished.

The Shifting Fed Rate Cut Narrative

Market positioning has swung decisively away from betting on imminent Fed easing. Fed funds futures now price in only a 43% probability of a 25-basis-point reduction in December, a dramatic reversal from the 62% implied probability recorded just seven days prior. This recalibration reflects changing consensus about the trajectory of monetary tightening cycles and heightened uncertainty about the central bank’s next move.

Strategists at ING offered cautious perspective, noting that “if the Fed holds in December, it is likely to be a temporary pause,” while emphasizing that employment data and economic indicators will prove crucial in shaping the Fed’s forward guidance.

U.S. Labor Market Signals Deterioration

The fading of rate cut expectations connects directly to labor market concerns that emerged from Federal Reserve commentary on Monday. Fed Vice Chair Philip Jefferson characterized hiring conditions as “sluggish,” pointing to corporate reluctance to expand headcounts amid policy uncertainty and technological disruption. Expectations surrounding September payroll figures—due Thursday—may further influence whether market participants maintain or abandon their rate cut thesis.

These labor market headwinds contributed to equity market weakness, with all three major U.S. indices retreating as investors reassessed economic growth assumptions.

Currency Markets Reflect Policy Expectations

Beyond the yen’s significant descent, other major currencies traded with mixed conviction. The euro held steady at $1.1594, while sterling weakened marginally by 0.1% to $1.3149 for a third consecutive session of losses. The Australian dollar drifted lower to $0.6493, and the New Zealand dollar remained anchored at $0.56535.

Japan’s Finance Minister Satsuki Katayama publicly expressed alarm over “one-sided, rapid moves” in foreign exchange markets during a press conference, warning of potential economic damage from currency instability. Prime Minister Sanae Takaichi is scheduled to convene with Bank of Japan Governor Kazuo Ueda today to address these mounting external pressures.

Bond Yields Send Mixed Signals

Treasury markets reflected the complex interplay between growth concerns and rate expectations. The two-year note yield contracted by 0.2 basis points to settle at 3.6039%, while the ten-year yield inched higher by 0.6 basis points to 4.1366%—suggesting investors remain conflicted between recession hedges and longer-duration inflation considerations.

As Thursday’s employment data approaches, market participants face a critical juncture in reassessing both Fed trajectory and near-term asset valuation across currencies and equities.