Dollar Stabilizes in Anticipation of Fed Rate Cuts

The US dollar remained stable on Monday, as investors waited for the Federal Reserve’s next interest rate decision, expected by the end of September. Meanwhile, the Japanese yen, a safe-haven currency, fell slightly, losing some of its recent gains amid uncertainty over the size of the Fed’s expected rate cut.

Last week’s U.S. employment report did not clearly indicate whether the Fed would opt for a standard 25 basis point cut or a more aggressive 50 basis point cut at its next policy meeting. While employment growth in August was lower than expected, the unemployment rate declined and wages continued to rise, pointing more to a slow cooling rather than a rapid slowdown in the labor market.

Currency markets saw limited movement in early Asian trading, stabilizing after some fluctuations following the release of Friday’s nonfarm payrolls data. The yen was down 0.26% to 142.65 against the dollar, partly retreating after last week’s 2.73% rise on increased market caution.

The yen’s movement was not significantly influenced by Japanese economic data released on Monday, which showed that the country’s growth in the April-June period was slightly lower than initially expected, mainly due to reduced business and personal spending.

The euro rose 0.03% to $1.1089, and the British pound advanced 0.06% to $1.3138. The dollar index, which compares the greenback to a basket of currencies, was virtually unchanged at 101.21.

A global macro strategist at Convera stated, “With mixed signals from the labor market, it is unlikely the Fed will commit to a 25 or 50 basis point cut just yet.” Fed leaders have signaled a willingness to initiate a series of rate cuts, with the next meeting scheduled for September 17-18, as they recognize a slowdown in the labor market that could worsen without a change in policy.

Market futures currently point to a 35% chance that the Fed will cut rates by 50 basis points next week. The next major economic indicator that could shape market expectations will be Wednesday’s U.S. inflation report.

Macquarie’s chief economist anticipates a 25 basis point cut in September, with similar reductions likely in November and December, unless economic data indicate the need for larger cuts.

In the currency market, the Australian dollar rose 0.07% to $0.6675, recovering slightly from Friday’s more than 1% drop and a three-week low. The New Zealand dollar was flat at $0.6175, near its two-week low on Friday.