Market Caution Grows Ahead of Fed Signals

The U.S. dollar briefly reached a new nine-and-a-half-month peak against the yen on Tuesday before retreating, and it slipped modestly against the euro as investors grew uneasy about Japan’s fiscal direction and looked ahead to upcoming U.S. economic releases for indications of the Federal Reserve’s next steps.

Global equities weakened, with the sharpest declines concentrated in technology-heavy markets, though currency movements remained relatively subdued. The dollar index, which tracks the U.S. currency against a basket of major peers, was steady at 99.52 after breaking a four-day losing streak on Monday. Market participants awaited key U.S. data following the prolonged government shutdown, with the September employment report due on Thursday.

Paul Mackel, HSBC’s global head of foreign-exchange research, noted that the forthcoming figures, though backward-looking, remain highly significant because they capture the early stages of the Fed’s renewed easing cycle and follow Chair Jerome Powell’s dovish remarks on labour market conditions at Jackson Hole.

Fed Governor Christopher Waller continued to argue for additional rate cuts amid internal policy disagreements, while Vice Chair Philip Jefferson emphasized the need for a cautious approach. Money markets now assign roughly a 50% probability to a 25-basis-point cut next month, down from 60% a week earlier, according to the CME FedWatch tool.

The yen strengthened slightly to 155.05 per dollar after touching 155.37, its weakest level since early February. Although Bank of Japan Governor Kazuo Ueda has hinted at the possibility of raising interest rates as early as next month, Prime Minister Sanae Takaichi has expressed opposition, urging the central bank to align with fiscal efforts to revive growth. Barclays recommended maintaining long dollar positions against the yen, contending that Takaichi’s policy approach is likely to further undermine the Japanese currency. The bank raised its dollar-yen forecast to 158.8, citing expectations that increased fiscal spending will expand public debt and elevate the risk premium demanded by investors.

Concerns over potential foreign-exchange intervention remain, though analysts believe recent official remarks do not signal any immediate action. Finance Minister Satsuki Katayama voiced discomfort with recent currency moves, while proposals for a stimulus package of roughly 23 trillion yen—substantially above earlier estimates—added to worries about increased bond supply. These concerns helped steepen the Japanese government bond yield curve, with 20-year yields reaching their highest level in 26 years.

The euro edged up to $1.1596, and the Australian dollar was stable at $0.6494 after minutes from the Reserve Bank of Australia’s early-November meeting indicated that the current cash rate of 3.6% may no longer be restrictive, noting strong growth in investor housing credit.