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the dollar fell below the key psychological level of 140 against the yen on monday, hitting its lowest level in nearly nine months, falling to 139.58 during the european trading session, after several media reports said the federal reserve may cut interest rates by 50 basis points this week.

analysts said that multiple media reports that a 50 basis point rate cut is still an option, while former new york fed president dudley also advocated a sharp rate cut, led to a shift in market expectations.

u.s. interest rate futures markets reflect a 51% chance of a 50 basis point rate cut by the central bank at this week’s policy meeting, up from around 15% earlier last week.

brad bechtel, head of foreign exchange at jefferies, said that after new inflation data reinforced expectations of a 25 basis point rate cut by the federal reserve, media reports introduced the possibility of a 50 basis point rate cut to the market. due to changes in market expectations, investors are adjusting their trading positions to accommodate a possible 50 basis point rate cut.

the yen has been the best performing g10 currency this quarter, rising nearly 15% as investors expect the interest rate gap between the united states and japan to narrow further.

the federal reserve is all but certain to cut u.s. borrowing costs this week, with the only question being how much, while japan is expected to keep interest rates unchanged on friday after raising them twice this year.

"all the volatility is now coming from interest rates, with the market pricing in further rate cuts from the fed and further rate hikes from the bank of japan," said chandresh jain, asia rates and foreign exchange strategist at bnp paribas.

jain expects the yen to continue to appreciate next year but warned there are "considerable risks", including the outcome of the u.s. election and the risk of higher tariffs.

he added that foreign financial institutions would also be forced to sell part of their portfolios to cope with the unwinding of yen carry trades, but a complete collapse of carry trades had not yet been seen.

while the bank of japan may not change borrowing costs this week, most economists expect it to increase them again in december. the central bank raised its policy rate to 0.25% on july 31, roiling global markets in early august and hitting assets including currencies, bonds and stocks.

bank of japan board member naoki tamura sent a strong hawkish signal to the outside world last thursday: the bank of japan may raise interest rates more in the future than many economists expect. he pointed out that japan's neutral policy rate is 1% or higher, and the bank of japan may have to raise interest rates quickly.

in addition, japan's nationwide holiday on monday was also a reason for the yen's rise. ryota abe, asia-pacific economist at sumitomo mitsui banking corporation, warned that holiday "speculators" took advantage of the thin trading, which could easily cause large market fluctuations.

however, he said the yen could end the year at 135 yen per dollar, its highest level since may last year. "the dollar will certainly fall against the yen in the near term, with some sharp fluctuations."