Dollar Hits Four-Month Low as Fed's Waller Tempers Rate Hike Bets; Yen Soars

The U.S. dollar weakened sharply on Thursday, hitting its lowest level since May, after comments from a key Federal Reserve official were interpreted as dovish, scaling back market expectations for another interest rate hike in September. The move was amplified by a surge in the Japanese yen, which rallied as traders increased bets on a policy shift by the Bank of Japan.

Waller's Comments Shift Fed Expectations

A primary catalyst for the dollar's decline was remarks from Federal Reserve Governor Christopher Waller, who stated that his decision for the September meeting would be "largely influenced" by next week's August inflation report. Markets interpreted his acknowledgment of progress on inflation as a signal that the central bank may be closer to pausing its tightening cycle.

Following his comments, the probability of a 25-basis-point rate hike at the Fed's September 16 meeting, as implied by swaps contracts, fell to approximately 50%. This marks a significant drop from a probability of around 70% priced in by the market earlier in the week.

"Waller’s speech today sent a dovish signal, pushing the dollar lower as the market moderately pared back expectations for a September hike," said Alex Cohen, a foreign exchange strategist at Bank of America, according to the source. Cohen added that weak U.S. employment or inflation data could exert further downward pressure on the dollar.

Yen Surges on Rate Hike Bets and Intervention Watch

Ad

The dollar's weakness was compounded by a dramatic rally in the Japanese yen, which strengthened by approximately 2% against the greenback, leading gains among G10 currencies. The yen's move was driven by a combination of rising expectations for a Bank of Japan rate hike and persistent speculation about potential currency market intervention by Japanese authorities.

Recent, more hawkish signals from Bank of Japan officials have prompted investors to reassess the country's interest rate trajectory. At the same time, traders remain on high alert for any official action to stabilize the currency, adding to the yen's upward momentum.

Market Awaits Key U.S. Economic Data

With Fed expectations now more balanced, investors are turning their attention to crucial upcoming U.S. economic data. The monthly employment report, due Friday, will be closely watched for signs of a cooling labor market, which could further diminish the case for another rate increase.

Following the jobs data, next week's August inflation figures will be a critical determinant for the Fed's next move and the dollar's short-term direction. Data showing a continued slowdown in price pressures could solidify expectations for a pause in September, potentially weighing further on the dollar, while any unexpectedly strong readings could quickly revive rate hike bets.