U.S. dollar inches lower as Fed cut bets gain steam; yen rises on BOJ hike signals

Investing.com - The U.S. dollar softened marginally on Monday, as investors gauged the trajectory of U.S. interest rates ahead of an upcoming Federal Reserve monetary policy meeting this month.

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Markets have increased their wagers on a Fed cut after a run of tepid U.S. economic data points reinforced the view that growth is cooling and inflation pressures are muted, albeit sticky, in the world’s largest economy.

The shift pushed money-market pricing to imply nearly a rougly 88% chance of a quarter-point reduction at the Fed’s December 9–10 meeting, up from about 40% only a week earlier.

At the same time, markets are assessing President Donald Trump’s statement that he has decided on his pick for the next Federal Reserve chair, although Trump declined to provide the exact name.

According to recent reports, the shortlist under consideration includes White House economic adviser Kevin Hassett, former Fed Governor Kevin Warsh, and current Fed Governor Christopher Waller. Hassett is reportedly the frontrunner for the role, but he downplayed these predictions, saying only that he would be "happy to serve."

A shift in leadership could influence the Fed’s policy trajectory significantly. Reports have repeatedly indicated that Trump could select a close ally to replace current Fed Chair Jerome Powell, whose term ends in May.

Given Trump’s repeated calls for aggressive and rapid rate cuts, this could signal a more “dovish” change in looser monetary policy, which could further support equities, especially rate-sensitive sectors such as retail and growth stocks.

Powell is due to speak later in the day. However, the Fed is currently in its pre-meeting blackout phase, meaning he is not anticipated to provide fresh comments on the trajectory of interest rates.

Against this backdrop, the U.S. dollar index, which tracks the greenback against a basket of currency pairs, edged down by 0.2% to 99.25 by 07:01 ET (12:01 GMT).

Yen gains on BOJ hike expectations

The Japanese yen strengthened against the dollar after Bank of Japan Governor Kazuo Ueda suggested that policymakers would consider the “pros and cons” of raising interest rates at its upcoming December 18–19 meeting.

Ueda hinted as well that there is no clear opposition from new Prime Minister Sanae Takaichi, a notable supporter of easier monetary policy, to raising rates, analysts at ING said.

"This second factor had been crucial for markets, whose basic understanding was that Takaichi was a dovish-leaning influence," they wrote.

Investors interpreted Ueda’s phrasing as hawkish, lifting expectations that the BOJ could deliver its first rate increase since exiting negative borrowing costs earlier this year.

The yen was also bolstered by a rise in Japanese government bond yields, as traders priced in a higher probability of tightening.

Elsewhere, the euro ticked up by 0.3% against the dollar to $1.1630 and sterling was broadly flat.