The dollar dropped to its lowest level of the year against the yen on Friday, while gold surged to a record high. This followed a dramatic shift in investor expectations for a large Federal Reserve interest rate cut next week. Stocks, Treasury prices, and commodities all rallied after traders raised the probability of a half-point cut from the Fed to 41%, up from just 14% a day earlier. This shift was triggered by reports in the Financial Times and Wall Street Journal calling the decision “a close call.”
Former New York Fed President Bill Dudley added fuel to the speculation by stating at a forum in Singapore that “there’s a strong case for 50” basis points. Fiona Cincotta, market strategist at City Index, said, “I’ve been firmly in the 25-basis-point camp until now. This is actually making me think they might go 50.” She added, “It feels like a coin toss now, as reflected in the market’s reaction across bonds, the yen, the U.S. dollar, and gold.”
The dollar slid as much as 1.0% to 140.36 yen, its weakest level since December 28, before settling at 140.755, down 0.74%. The yen has also been buoyed by hawkish remarks from Bank of Japan officials, with policy board member Naoki Tamura expressing concern over rising inflation risks. Meanwhile, the dollar index fell to a one-week low of 101.00.
In the bond market, U.S. Treasury yields declined, with 10-year yields dropping 3.2 basis points to 3.648%, and two-year yields falling 5.7 basis points to 3.591%. Commonwealth Bank of Australia strategist Carol Kong argued that current market pricing for Federal Open Market Committee (FOMC) easing was too aggressive. She said, “We continue to favor a 25 bp cut over a 50 bp cut, as the labor market and broader economy remain resilient.”
Gold and Oil Surge
Global shares continued to climb, with the MSCI World Index up 0.2% and Europe’s STOXX 600 index rising 0.5%. The euro also strengthened, climbing 0.13% to $1.1086, after a 0.57% rise on Thursday, boosted by European Central Bank President Christine Lagarde’s pushback against an October rate cut.
Gold posted its strongest weekly gain since mid-August, surging 2.8% to a record $2,570 per ounce due to the weakening dollar. Crude oil also extended its rally, with U.S. West Texas Intermediate crude futures rising 1.2% to $69.79 a barrel and Brent crude futures gaining 1% to $72.70, as producers assessed the impact of Hurricane Francine on Gulf of Mexico output.
The combination of shifting Fed expectations, currency movements, and commodity gains has created a volatile landscape for investors ahead of next week’s key central bank decisions.