For the first time in four months, the Japanese Yen seemed poised to mark its impressive performance against the dollar by the end of the week, buoyed by the expectations of diminishing U.S.- Japan rate difference. The speculation that the Federal Reserve might halt its rate hikes has steered the greenback towards a weekly decline.

A string of disappointing U.S. economic indicators released this week, notably a slowdown in inflation, has reinforced the market belief that the Fed has completed its aggressive monetary tightening phase. Attention has now shifted to when the first rate cuts might commence.

Market indicators suggest a mere 0.3% likelihood of another rate increase in December, contrasting to about 15% estimated a week earlier. Additionally, there’s a 35% probability that the U.S. central bank might initiate a loosening of monetary conditions as early as March next year, according to the CME FedWatch tool.

Consequently, U.S. Treasury yields have dwindled, contributing to a dip in the dollar’s value. The dollar was on course to depreciate by almost 0.6% against the yen for the week, marking its poorest weekly performance since July.

Meanwhile, the EURO and Sterling Pound appeared set for a weekly surge of over 1.5% each against the greenback. Simultaneously, the dollar index was poised to slide by 1.3%.

The EURO stabilized around $1.08851, while sterling was last quoted at $1.2412.

Sean Callow, a senior currency strategist at Westpac, noted, “The market’s reaction to the(U.S.) CPI was substantial despite a relatively minor inflation miss, signaling potential trouble for the dollar in the future. This could set the stage for discussion in the market about the December FOMC statement, not only regarding rate holds but potentially a shift to a more neutral stance.”

Recent data unveiled a decline in U.S. retail sales for the first time in seven months in October. Moreover, signs of a cooling U.S. labor market persist as the number of Americans filing new claims for unemployment benefits hit a three-month high last week. 

The Japanese yen was last recorded at 150.72 per dollar, remaining weaker and staying close to Monday’s one-year low of 151.92 per dollar.

Despite prospects of U.S. rates hitting a peak and beliefs among insiders that the Bank Of Japan (BOJ) might prepare markets for an end to negative interest rates, the significant disparity between Japan’s ultra-low rates and those in the United States continues to exert pressure on the Yen.

Callow added, “We anticipate the BOJ to exercise caution. Our viewpoint suggests they won’t adjust policy settings for many months, likely well into next year. If that holds true, the U.S. dollar might lose its yield appeal, but we don’t foresee it significantly altering the landscape given the substantial rate gap.”

In other currency movements, the Australian and New Zealand dollars were also eyeing gains of 1.7% and 1.3% respectively for the week, benefiting from the dollar’s downturn. 

The Aussie slightly receded by 0.08% to $0.6466, showing minimal reaction to favorable Australian jobs data released in the previous session whereas the Kiwi slipped by 0.14% to $0.5963.