The Dollar declined and the Yen reached its highest point in over a year on Monday, as investors grew more convinced that the Federal Reserve will implement a substantial rate cut later this week.

The greenback dropped to 139.58 Yen, moving further away from the 140.285 low it hit at the end of December, and reaching levels not seen since July 2023.

The Fed's meeting on 17th-18th September is the main event in a week packed with central bank activities, including policy announcements from the Bank of England on Thursday and the Bank of Japan on Friday, Reuters reports.

Recent comments from Fed officials and economic data have led markets to reassess the likelihood of a significant rate cut this week, with debate ongoing about whether the Fed will address potential labour market weakness with bold cuts or adopt a more cautious, wait-and-see strategy.

Futures markets were fully anticipating a quarter-point rate cut from the Fed on Wednesday, with approximately a 60% probability of a more substantial 50 basis point cut. 

This contrasts with last week, when the likelihood of a larger move was around 15%.

“It's all about the Fed and the question about whether it will be a big 50 basis point cut or a smaller 25 basis one,” according to Niels Christensen, chief analyst at Nordea. “That's why the Dollar is softer across the board.”

The Dollar index, measuring the currency against six rivals, fell 0.3% to 100.69 at the time of writing.

Treasury yields have been declining in the lead-up to the eagerly awaited Fed meeting, especially as expectations grow for the Fed to implement a more aggressive half-point rate cut.

Benchmark 10-year yields have dropped by 30 basis points over the past two weeks. Two-year yields, which are more sensitive to monetary policy expectations, have fallen to about 3.55% from approximately 3.94% two weeks ago.

According to Chris Weston, head of research at Australian online broker Pepperstone, trading the Dollar for Yen has been the most straightforward strategy for investors capitalising on the decline in Treasury yields.

“While speculators are short and riding this lower, this trend is clearly one to align with,” he said.

Investors are also focused on the Bank of Japan's (BOJ) interest rate decision on Friday, where it is anticipated that the central bank will maintain its short-term policy rate target at 0.25%, following two rate hikes earlier this year.

BOJ board members have shown a preference for higher rates, and the decreasing difference between Japanese rates and those of other major currencies has driven the Yen up and led to the unwinding of billions of Dollars in Yen-funded carry trades.

“We are expecting higher rates in Japan and lower rates in the US, so the interest rate differential is favouring a stronger Yen against the Dollar,” Christensen said.