Fed Rate Cut Expectations Fade, Yen Slides to Nine-Month Low

The Japanese yen has descended to its weakest point in nine months, plunging to 155.29 per dollar as market participants reassess the probability of a Federal Reserve interest rate reduction at the December 10 meeting. The shift in expectations has been dramatic: Fed funds futures now price in merely a 43% likelihood of a 25-basis-point cut, a sharp reversal from the 62% probability recorded just one week prior.

This fade in rate-cut bets has fundamentally reshaped currency dynamics. The strengthening U.S. dollar—driven by sustained higher-for-longer interest rate narratives—has pressured the yen considerably during early Asian trading on Tuesday. The divergence between monetary policy expectations in the United States and Japan has widened the dollar-yen spread, propelling the currency pair to levels not seen since March.

Market Drivers: Labor Market Resilience Undercuts Fed Easing

The erosion of rate-cut expectations stems largely from mixed signals in the U.S. labor market. While Federal Reserve officials, including Vice Chair Philip Jefferson, have noted “sluggish” hiring patterns and emerging layoff concerns, the data narrative remains sufficiently strong to justify a pause in easing cycles. Thursday’s release of September payroll figures is poised to be a critical inflection point for near-term Fed positioning.

ING analysts cautioned that “if the Fed holds in December, it is likely to be a temporary pause,” underscoring that incoming employment data will be instrumental in shaping subsequent policy decisions. The uncertainty surrounding both AI-driven workforce transitions and traditional hiring dynamics has left policymakers in a holding pattern.

Japan’s Policy Response and FX Market Concerns

Japanese Finance Minister Satsuki Katayama flagged concerns about “one-sided, rapid moves” in the foreign exchange market during a press briefing, warning of potential economic headwinds from sustained yen weakness. Prime Minister Sanae Takaichi is scheduled to convene with Bank of Japan Governor Kazuo Ueda, a meeting that underscores Tokyo’s unease with currency depreciation trajectories, despite historical preferences for weaker yen conditions to support exporters.

Ripple Effects Across Global Assets

The recalibration of rate expectations has rippled through multiple asset classes. U.S. equity markets declined across all three major indexes as investors reassessed growth and earnings outlooks. Treasury yields compressed selectively: the two-year yield retreated 0.2 basis points to 3.6039%, while the 10-year yield edged up 0.6 basis points to 4.1366%, reflecting a modestly flattening curve.

In currency markets, the euro held steady near $1.1594, the British pound weakened 0.1% to $1.3149 amid three consecutive sessions of losses, the Australian dollar fell to $0.6493, and the New Zealand dollar remained anchored at $0.56535. The divergence in currency performance underscores the complexity of positioning amid an uncertain Fed trajectory.