Dollar Hits Year-Low Against Yen Amid Fed Rate Cut Speculation

The dollar plunged to its lowest level against the Japanese yen this year as speculation about an outsized Federal Reserve rate cut surged. Media reports and comments from a former Fed official fueled market debates, with traders now eyeing a 50 basis point cut next week. The euro, pound, and Swiss franc gained against the dollar.

The dollar plunged to its lowest level against the Japanese yen this year on Friday, spurred by renewed speculation about an outsized Federal Reserve rate cut next week. The U.S. currency dropped over 0.8% to 140.645 yen, marking its lowest point since late December, and last traded 0.7% lower at 140.8. Meanwhile, the euro, the pound, and the Swiss franc made gains against the dollar.

This week's U.S. economic data appeared to bolster the case for a standard 25 basis point rate cut next week, with consumer price inflation—excluding volatile food and energy prices—rising more than anticipated in August. Nevertheless, reports from the Wall Street Journal and the Financial Times suggested a 50 basis point cut is still in play, prompting a shift in market expectations. Comments from a former Fed official advocating for a larger cut also fueled the debate.

Traders have now assigned a roughly 40% chance of a 50 basis point cut by the Fed next Wednesday, up significantly from earlier this week. Former New York Federal Reserve President Bill Dudley has argued there is a strong case for a 50 basis point cut, stating current rates are well above the 'neutral rate' for the U.S. economy. Meanwhile, the euro edged up 0.15% to $1.1095, buoyed by less-than-dovish signals from the European Central Bank. Sterling also rose, and investors are closely watching upcoming rate moves by the Bank of England and Bank of Japan.

The Swiss franc, like the yen, remains highly sensitive to Fed policy expectations and U.S. bond yields. Investors are also keenly anticipating the Bank of Japan's rate decision next Friday, with expectations it will keep rates steady at 0.25%. BOJ board member Naoki Tamura recently stated the central bank must raise rates to at least 1% as soon as the second half of the next fiscal year, albeit slowly and in stages.

(With inputs from agencies.)