By Karen Brittl
NEW YORK (Reuters) – The dollar fell to a seven-month low and the Japanese yen hit its highest in more than a week as traders awaited comments from Federal Reserve Chairman Jerome Powell this week that are likely to signal the U.S. central bank will start cutting interest rates in September.
Powell’s speech in Jackson Hole on Friday will focus on whether he will signal that the Fed is likely to cut interest rates by 25 or 50 basis points. Chances of a bigger cut have receded since data last week showed higher-than-expected inflation in July and a strong retail sales report for the month.
Another key focus will be whether Powell signals the possibility of a rate cut at each future meeting, but markets may be overestimating how quickly the Fed will move.
“I think we’re still at the point where a cut in September is justified,” said Eugene Epstein, head of North American structuring at MoneyCorp in New Jersey.
“On a relative basis, it would be a stretch to be one of the last central banks to start the easing cycle, but also to start easing immediately and cut 50 basis points and then cut every meeting after that.”
Traders are pricing in a 25% chance of a 50 basis point rate cut, down from 50% a week ago, with a 75% chance of a 25 basis point cut, according to the CME Group’s FedWatch tool. Rates are expected to be cut by about 210 basis points by the end of 2025.
In early August, traders aggressively priced in interest rates in anticipation of an imminent rate cut after an unexpected rise in the unemployment rate in July raised concerns about a possible recession.
The sharp decline in dollar/yen carry trades, in which traders borrowed low-interest-rate yen and bought higher-yielding U.S. assets, also rattled the stock market and led to a sharp repricing of interest rate expectations.
“It looks like the market is now starting to correct itself a little bit in the right direction,” Epstein said.
Minneapolis Federal Reserve President Neel Kashkari said it was appropriate to discuss a possible U.S. interest rate cut in September because of the growing likelihood of a weaker labor market, the Wall Street Journal reported Monday.
San Francisco Federal Reserve President Mary Daly said it was time to consider adjusting borrowing costs from their current range of 5.25% to 5.5%, in an interview with the Financial Times published on Sunday.
Chicago Federal Reserve Bank President Austin Goolsbee said Sunday that credit conditions in the United States are tough and getting tougher, and that while there is no certainty that the central bank will cut interest rates next month as widely expected, failure to do so could hurt the labor market.
Minutes from the Federal Reserve’s July meeting will also be evaluated on Wednesday for any fresh clues on the expected path of interest rates.
The euro fell 0.34% to $102.11, having earlier hit $102.00, its lowest since Jan. 5. The euro rose 0.19% to $1.1049, having hit its highest since Dec. 29 at $1.10545, its strongest since Dec. 29.
The dollar fell 0.75 percent to 146.48 Japanese yen after earlier reaching 145.20 yen, its lowest level since Aug. 7.
The Japanese currency gained on optimism that the interest rate gap between the US and Japan will continue to narrow and as USD/JPY interest rate positions continued to be unwinded.
Bank of Japan Governor Kazuo Ueda is expected to discuss the central bank’s decision last month to raise interest rates when he appears in parliament on Friday.
Japan’s consumer inflation likely rose for a third straight month in July, a Reuters poll of 18 economists showed, keeping the central bank on track to consider another interest rate hike after raising short-term rates to 0.25 percent last month.
The Australian dollar rose on optimism that China will offer fresh stimulus through shopping vouchers aimed at helping return growth to its target of around 5% this year.
The pound rose 0.56% to $0.6703, reaching $0.6708, its highest level since July 19.
In cryptocurrencies, Bitcoin fell 1.87% to $58,178.
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