As dollar faces crunch week for US rates, yen holds gains

The dollar opened Monday in a cautious mood in what is shaping up to be a crucial week for the prospect of a US rate cut, while the yen’s recent rebound was underpinned by bets on rising rates at home.

Over the weekend, Bank of Japan Governor Kazuo Ueda said the next interest rate hike was “closer in the sense that economic data is on track,” as Tokyo inflation data showed in October.

Markets now suggest a 56% chance the BOJ will raise a quarter point to 0.5% at its December 18-19 policy meeting.

Barclays economist Christian Keller said this week’s data on labor earnings should show further gains and all signs point to another strong “shunt” wage round in February.

“The wage and inflation picture continues to support further rate hikes, although whether the BOJ moves in December or January is a close call,” he added.

The risk of an early rise was enough to keep the dollar at 149.60 yen, down 3.3% last week in its worst run since July. Support is around 149.40/47 and 147.35.

The euro was held at $1.0555, after rising 1.5% last week and off a one-year trough of $1.0425. That dollar index was flat at 105.790, closing November with a 1.8% gain even after last week’s shock.

“Given the continued resilience of the US economy and the deteriorating outlook elsewhere, we don’t think this is the start of a deeper setback for the dollar,” said Jonas Golterman, deputy chief market economist at Capital Economics.

“But the bar for further changes in expected interest rates in favor of the US in the near term remains high,” he added. “A period of year-end consolidation looks like the most likely scenario to us, although risks remain skewed in favor of the dollar through 2025.”

Key to the outlook for rates will be Friday’s November payrolls report where the average forecast favors an increase of 195,000 following October’s weather and strike-hit report, which could be revised down due to a lower response rate to that survey.

The unemployment rate is seen rising to 4.2% from 4.1%, which the Federal Reserve should cut by 25 basis points on December 18.

Markets suggest a 65% chance of such easing, although they only have two more price cuts for 2025.

Fed officials, including Fed Chair Jerome Powell on Wednesday, are due to speak this week, while other data include the manufacturing and services survey.

The European Central Bank is also seen cutting rates this month, with markets pointing to a 27% chance it could ease by as much as 50 basis points on December 12.

Political uncertainty is another drag on the single currency as investors wait to see if the French government can survive the week intact.

Leaders of France’s far-right National Rally said on Sunday that the government had rejected its calls for more budget concessions, raising the possibility of a no-confidence vote in the coming days that could topple Prime Minister Michel Barnier.

Fears of ever-widening budget deficits saw French yields match Greece’s while the spread over German yields reached its highest since 2012.