Dollar Strengthens as Fed Rate Cut Expectations Continue to Fade

The yen’s downward momentum shows no signs of slowing. During Tuesday’s early Asian session, the Japanese currency tumbled to 155.29 per dollar—marking its lowest point in nine months—as traders reassess the likelihood of Federal Reserve action in December. The shift in market sentiment has been stark: Fed funds futures currently price in just a 43% probability of a 25-basis-point rate reduction next month, a dramatic slide from the 62% odds recorded merely seven days prior.

Market Moves Signal Changing Fed Calculus

The erosion of rate-cut optimism reflects growing skepticism about the Fed’s willingness to pivot. Economic data arriving Thursday—September’s employment figures—will likely serve as a decisive factor in shaping the narrative for the December 10 policy decision. Fed Vice Chair Philip Jefferson recently described labor market conditions as “sluggish,” acknowledging that firms are growing increasingly cautious about hiring amid broader economic headwinds.

This developing picture has spooked investors. All three major U.S. stock indexes retreated, while Treasury yields sent mixed signals: the two-year note fell 0.2 basis points to 3.6039%, while the 10-year climbed 0.6 basis points to 4.1366%.

Japanese Officials Sound the Alarm

Japan’s Finance Minister Satsuki Katayama wasted no time voicing alarm over what she termed “one-sided, rapid moves” in foreign exchange markets. The yen’s slide threatens to complicate Japan’s economic outlook, prompting Prime Minister Sanae Takaichi to schedule talks with Bank of Japan Governor Kazuo Ueda. Coming from a leader who has championed expansionary policies—measures typically associated with currency depreciation—the meeting carries symbolic weight.

ING analysts suggest that even if the Fed holds steady in December, expect additional rate cuts down the line. The question isn’t whether cuts arrive, but when and how aggressively the Fed will move.

Global Currency Markets in Flux

The dollar’s strength rippled across foreign exchange markets. The euro flatlined at $1.1594, while sterling dipped 0.1% to $1.3149 (its third consecutive daily loss). The Australian dollar fell to $0.6493, and the New Zealand dollar held steady at $0.56535. These moves underscore how interconnected rate expectations have become in driving currency valuations globally.

As markets digest this recalibration of Fed policy odds, volatility is likely to remain elevated—particularly ahead of the employment data release and the December decision itself.