Dollar slides as markets bet on Fed rate cut in September

The US dollar continued to lose ground against major currencies this week, with the Japanese yen, New Zealand dollar, and euro all firming as markets price in growing expectations that the Federal Reserve will begin easing policy at its September meeting.

Yen Draws Dual Support

The USD/JPY pair slipped to 158.86 on August 21, extending a monthly decline of more than 2.6%, according to Trading Economics. The yen's strength reflects both a softening greenback and hawkish expectations for the Bank of Japan, which held rates at 1% at its July meeting but signaled that upside inflation risks could warrant a move as soon as September.reuters+1

Reuters reported on August 14 that the BOJ is set to raise rates at its September 17-18 meeting and is considering a faster pace of tightening thereafter, with markets pricing in nearly an 80% chance of a hike. The central bank has already raised rates from 0.75% to 1% at its June meeting, and traders are looking ahead to a potential policy rate of 1.75% or higher over the coming year.whbl+2

Euro, Kiwi and Sterling Advance

EUR/USD pushed above 1.17 intraday on August 20 before settling near 1.1688 on August 21, holding close to three-month highs. Vantage Markets noted the pair remains supported by ECB rate hike bets alongside Fed easing expectations.finance.yahoo+1

The New Zealand dollar rose to 0.5985 against the greenback on August 21, gaining 0.73% in a single session. GBP/USD climbed to 1.3645 on August 21, its highest level since at least early March, with multiple data sources showing the pair testing the upper end of its recent range near 1.3676 intraday.tradingeconomics+2

Fed Holds Steady, But Markets Eye September

The Federal Reserve left rates unchanged at 3.50% to 3.75% at its July meeting amid what Charles Schwab described as a "divided" committee. Investing.com's Fed rate monitor tool shows markets pricing a 61% probability that the Fed will cut rates by 25 basis points at its September 16 decision. The broad dollar weakness reflects this shifting outlook, as softer US economic data has fueled speculation about the start of an easing cycle.investing+1

Scotiabank's latest FX analysis noted that the reduction in the US yield advantage over Japanese counterparts is making the yen more attractive, while the divergence in central bank trajectories is creating a "more balanced trading environment" for USD/JPY. With the BOJ's September meeting and the Fed's decision both looming, currency traders face a pivotal few weeks ahead.cryptorank