The U.S. dollar dropped to its lowest point of the year against the yen, and gold surged to a record high on Friday as shifting expectations for a significant Federal Reserve interest rate cut drove market movements. Investors are now weighing the likelihood of a half-point rate cut, following reports that the decision could go either way.
Traders increased the odds of a 50 basis-point rate cut by the Fed next week to 41%, up from just 14% the day before. This adjustment came after articles from the Financial Times and Wall Street Journal described the upcoming Fed decision as “a close call.” Adding fuel to speculation, former New York Fed President Bill Dudley commented that there’s a “strong case for 50” at a forum in Singapore.
As a result, the dollar slid by 0.97% to 140.415 yen, marking its lowest level since December 2022. It later recovered slightly but remained down 0.77% at 140.68 yen. The dollar’s weakness was compounded by hawkish comments from Bank of Japan officials, with board member Naoki Tamura voicing concerns about rising inflation risks.
The broader dollar index, which tracks the currency against a basket of six major rivals, also slipped to a one-week low of 101.00.
U.S. Treasury prices rallied, pushing the yield on the benchmark 10-year note down by 4.2 basis points to 3.638%, while the two-year yield, more sensitive to interest rate changes, fell by 6.8 basis points to 3.585%.
Despite the shift in market sentiment, some analysts remained cautious about the likelihood of a supersized rate cut. Commonwealth Bank of Australia strategist Carol Kong noted that the current market pricing for a 50 basis-point cut is “too high.” In her view, a 25 basis-point cut remains more probable, as the labor market and broader U.S. economy have proven resilient.
Global stock markets also responded positively to the potential for a larger rate cut. European stocks led the rally, with the STOXX 600 gaining 0.4%, contributing to a weekly gain of 2.6%, its best performance in a month. The euro continued its upward trend, rising 0.13% to $1.1087, building on the previous day’s 0.57% rise after European Central Bank President Christine Lagarde pushed back on the prospect of another rate cut this year.
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Gold saw its strongest weekly performance since mid-August, rising 2.8% to a record high of $2,570 per ounce, driven by the dollar’s weakness. It was last up 0.4% at $2,568 per ounce.
In Asia, markets saw moderate gains, with MSCI’s broad index of Asia-Pacific shares outside Japan rallying 0.53%. Japan, China, and South Korea are all heading into long weekends, with markets set to reopen mid-next week.
In the energy markets, crude oil prices continued to rise as producers evaluated the impact of Hurricane Francine on Gulf of Mexico output. U.S. West Texas Intermediate crude futures rose by 0.51% to $69.32 per barrel, building on Thursday’s 2.5% surge. Brent crude followed suit, climbing 0.5% to $72.30 per barrel after a 1.9% jump the day prior.
As investors brace for the Fed’s decision, markets are poised for continued volatility, with gold, stocks, and commodities rallying on the prospect of a larger-than-expected rate cut.
