The yen, dazed and confused, takes center stage before the Fed's big reveal.
In a week dominated by anticipation of the Federal Reserve's rate decision, the yen momentarily stole the spotlight on Wednesday. The currency's sudden overnight plunge, reaching a record low against the euro and a near 0.9% drop against the Aussie, left investors punch-drunk in Asia.
But here's where it gets controversial...
While a 25-basis-point hike by the Bank of Japan (BOJ) is widely expected, the market remains uncertain about the BOJ's future moves. With Japan's fiscal and growth concerns persisting, there's little justification for further tightening beyond December. So, if the anticipated hike next week is followed by another lengthy wait, the yen's trajectory is unlikely to shift significantly, leaving the currency vulnerable to further declines.
And this is the part most people miss...
Even at 0.75%, Japan's interest rates would remain among the lowest globally. Meanwhile, policymakers in Australia and Europe have hinted at potential rate hikes, adding to the currency's challenges.
In other news, markets reacted calmly to China's consumer inflation data, which showed a 21-month peak in November, while factory-gate deflation deepened. The Politburo, China's top decision-making body, pledged to continue expanding domestic demand and supporting the economy with proactive policies in 2026.
Indonesia's rupiah weakened slightly after a U.S. official warned that the country's trade agreement with the United States is at risk of collapsing due to Jakarta's backtracking on commitments. However, an Indonesian official later assured that tariff negotiations with the U.S. are on track.
The Fed's decision on Wednesday could be one of the most divisive in recent years.
The lead-up to the meeting has been stressful for investors, with conflicting signals from Fed officials and the Trump administration's relentless push for lower rates. White House economic adviser Kevin Hassett, the frontrunner for the Fed's chair, suggested there's room for further rate cuts, but acknowledged that inflation could change the calculus.
As the world awaits the Fed's decision, the Bank of Canada will also announce its policy decision later today, with expectations of a rate hold due to easing inflation and a robust economy.
Key developments to watch on Wednesday:
- Federal Reserve rate decision
- Bank of Canada rate decision
Reporting by Rae Wee; Editing by Muralikumar Anantharaman
Our Standards: The Thomson Reuters Trust Principles.
