Dollar Slides Versus Yen as Prospect of September Fed Hike Dims

The Factors Weighing on the Fed's Next Move
  • Odds of a Fed rate increase this month drop below 25 percent
  • Yen climbs as markets having a ‘hard time believing’ BOJ: ING

The dollar slid to the lowest level in almost two weeks versus the yen after a report Tuesday showed that U.S. service industries expanded at the slowest pace in six years, dimming prospects the Federal Reserve will increase interest rates this month.

A gauge of the greenback posted its biggest decline in five weeks Tuesday as futures showed the odds of a rate increase at the Fed’s Sept. 20-21 policy meeting fell to 20 percent from 32 percent Friday. The probability rose to 42 percent on Aug. 26 after Fed Chair Janet Yellen said at a symposium in Jackson Hole, Wyoming, that the case for higher rates had strengthened in recent months and Fed Vice Chairman Stanley Fischer said an increase is possible in September.

The yen surged after the Sankei newspaper reported that Bank of Japan board members are struggling to reach a consensus on a comprehensive policy review to be released at their September meeting and a former central bank executive said its stimulus program will be left unchanged this month.

“Pretty disappointing U.S. data has weighed on the dollar across the board,” said Petr Krpata, a London-based foreign-exchange strategist at ING Groep NV.

‘Most Sensitive’

The dollar-yen exchange rate is one of the “most sensitive” to Fed policy expectations among Group-of-10 currencies, Krpata said. “In the same way as you’ve seen dollar-yen higher at the end of the second half of last month because the market was pricing in a bigger probability of Fed rate hikes” on policy makers’ comments “now you can see the exact reversal.”

The dollar depreciated 0.4 percent to 101.57 yen as of 9:46 a.m. in New York, after touching 101.21, the weakest level since Aug. 26. The Bloomberg Dollar Spot Index, which measures the currency against a basket of 10 peers, was little changed after declining 1 percent Tuesday.

One of the “key catalysts” behind the dollar’s decline against the yen this year has been that “the market has a hard time believing that the BOJ will do something more,” ING’s Krpata said. “They are slowly but surely running out of firepower.” His one-month target is for the dollar to drop to 95 yen, a level not seen for three years.

BOJ Divided

BOJ policy board members are divided between those who support negative interest rates, prioritizing government-bond purchase, and others who oppose additional easing measures, Sankei reported, without saying where it got the information.

The central bank will leave its stimulus program unchanged at its meeting this month, given little deterioration in economic fundamentals and growing caution about the risks of expansion, said Kazuo Momma, a Tokyo-based economist at Mizuho Research Institute who left the BOJ in May.

A measure of expected price swings in the $5.1 trillion-a-day currency market dropped to a one-month low. JPMorgan Chase & Co.’s Global FX Volatility Index dropped to 9.71 percent Tuesday, the lowest closing level since Aug. 5, capping a five-day decline.

Currency investors are likely to “stay sitting on the fence” before the BOJ’s Sept. 20-21 meeting as they face the additional prospect of a reduction in stimulus, as well as the possibility of further easing or no change to the central bank’s policy, said Gareth Berry, a foreign-exchange and rates strategist in Singapore at Macquarie Bank Ltd.

“Dollar-yen can’t go very far in either direction in the lead up to Sept. 21, simply because there are three possible outcomes this time, rather than the usual two,” Berry said. “And so the risk-reward of a taking position going into this BOJ is much lower than usual.”

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