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The Federal Reserve confronts an unusual, perhaps unprecedented, combination of powerful economic forces operating in often conflicting ways.The division between interest rate hawks and doves is not the only issue.In the weeks running up to this week’s meeting of the US Federal Reserve, there has been an unusually volatile change of expectations. The assessed probability of a further quarter-point interest rate cut, to follow those in September and October, swung from a high of 90% to a low of 30% and back up to 90%. The 25 bps reduction is widely expected, taking it to 3.75-4.0%. The central banks of the Gulf Co-operation Council will duly reduce their base rates by the same amount consequently, in line with the policy of pegging currencies to the US dollar.The uncertainty in the markets reflects an unusual combination of policy challenges. The Fed has twin objectives: Supporting the labour market and controlling prices, and sometimes the two objectives are in conflict. This partly explains the divisions within the Federal Reserve: Both sides have strong arguments. Indeed, the discussion prior to the October interest rate decision was split three ways: Most were in favour of a quarter-point cut, with one vote for holding interest rates, and one vote for a half-point reduction.Since the 2008 financial crash, there has been a perceptible bias in Fed policy towards permitting liquidity, to prevent a recession, but this does come with a risk not only of inflation, but high levels of leverage, risk-taking and elevated asset prices.There has been some balance, and in June 2022 the Federal Reserve began a sustained policy of quantitative tightening (QT), reversing the easing policy (QE) that had predominated since 2008. The policy has been to tighten gradually and moderately, by not replacing expiring bonds with fresh purchases by the central bank. The chair of the Federal Reserve Jerome Powell has signalled that QT is now coming to an end. The new policy is one of ‘ample reserves’ – central bank purchases of government bonds at the same rate as that of GDP growth, whereas for a full QE policy it would be at a higher rate.Nonetheless, this is a significant easing of policy. One objective is to ease the cost of Government deficits, still running at 6% of GDP with no sign of falling, even as the debt climbs above the 100% mark. So far, the policy has been effective, and yields on US government debt have fallen.The bias towards liquidity has some merit, but in practice it encourages tendencies towards high levels of short-term leverage for long-term ventures, and it raises the level of interest rate needed for inflation to be curbed. This year has witnessed what has been dubbed an ‘everything rally’ in which risk stocks and defensive investments have risen in tandem – tech stocks, crypto, bond prices and gold. Historically they would be inversely correlated.It appears to be a benign combination, but there are risks, and it is one of the factors that makes policy making unusually challenging. There is a market expectation that the Fed will always come to the rescue with additional liquidity – lower interest rates and/or quantitative easing. But it cannot always oblige, and it is unhealthy for investors to become reliant on this sugar rush. There are indications that the market is expecting, or hoping for, a succession of further interest rate cuts in 2026 – perhaps as many as four. They may be disappointed, and it would be unwise to base investment strategies on this expectation.One of the causes of the fluctuating expectations is a factor beyond the control of the Fed: lack of data. The prolonged Government shutdown meant an extended period of time without accurate, national-level economic indicators. The jobs report for October was not released at all, and the November figures will be available after the 9-10 December meeting – at which the most recent official employment statistics will be for September.On balance, from the regional and private sector sources from which data is available, the jobs market is struggling. Meanwhile, inflation is above the target rate but not excessively, so a quarter point reduction this month is a reasonable policy.There are other dynamics, and there are no easy decisions. The AI investment boom may be justified by consequent productivity gains across the economy, but it is a big bet with a risk of substantial stock market falls if the gains fall below expectations. Moreover, the boom has played a significant role in maintaining short-term consumer demand, as a high proportion of households are invested in the stock market. So any losses would spread through the economy. Outside the tech sector, economic growth is sluggish, although company and household balance sheets are healthy.And the AI revolution may have some negative impacts on employment levels – it may bring about a jobless recovery if productivity gains are substantial.Next year could see some formidable challenges: If AI adoption and productivity gains are not sufficient to justify the huge investment in AI infrastructure, and if the end of QT unleashes excessive exuberance in leverage and asset prices. A further unknown is the individual who replaces Powell as chair of the Federal Reserve when his term ends in May. A chair who is keen to support President Donald Trump’s preference towards low interest rates and high asset prices could help fuel economic recovery, or introduce excessive risk. The President has indicated he will announce the appointee early in 2026. The individual is rumoured to be Kevin Hassett, an economic adviser to President Trump.The policy combination is, at least nominally, pro-growth. But the inflationary risks are not negligible. Stagflation and market falls are also possibilities.The author is a Qatari banker, with many years of experience in the banking sector in senior positions. 

Global bond investors are beginning to view select emerging markets as safer than many far richer nations, a momentous shift that’s setting the stage for the next phase of outperformance in the asset class.The trend is most evident in the sovereign and corporate securities from AA-rated countries like the United Arab Emirates, Qatar, Taiwan, South Korea and Czech Republic. They have delivered stronger total returns this year than equally rated developed-world credits, in dollars as well as in local currencies. And for some of these nations, dollar borrowing costs are slipping toward those of the US, long considered the safest market of all.What’s more, there are signs of a broader risk convergence, one that’s encompassing even economies with lower credit scores.The outperformance stems to a large extent from the progress that swathes of the developing world have made in cutting debt, taming inflation and improving current-account balances. But it’s also down to unprecedented fiscal backsliding in the Group of Seven industrialised nations, where debt-to-output ratios are set to rise for years more, eroding their safe haven status.“If I want fiscal conservatism and policy orthodoxy, I go to the emerging-market world currently, not developed markets,” said James Athey, a portfolio manager at Marlborough Investment Management.He’s upped emerging-debt allocations, buying Mexican peso debt, in addition to Chilean local bonds and South African dollar-denominated securities.In terms of annual bond gains, 2025 is set to be the strongest year in emerging markets since before the pandemic.In the sovereign dollar-debt market, investors now demand the smallest premium in seven years over Treasuries. For AA-rated issuers, that spread has shrunk to a record 31 basis points. And since late 2024, average local-currency debt yields have been below Treasury rates, with the discount widening to a record this August. China, Thailand, Malaysia and Lithuania are among countries that borrow at lower rates at home than the US can.To be clear, the emerging-market universe contains many fragile credits, mostly in Africa and Latin America, where debt distress and political instability are constant risks. Only a handful of sovereigns carry AA ratings — too few for investors to deploy meaningful capital. Investors also tend to treat developing countries as a group, selling indiscriminately when sentiment sours, and dumping strong credits with the weak.And much of this year’s outperformance is down to dollar weakness and lower US interest rates. That’s re-ignited the carry trade, luring capital to high-yielding markets like Lebanon and Argentina. And finally, factors such as longer bond duration and lower new debt supply have also helped.For all that, there’s a palpable shift underway: Instead of merely seeking carry, many investors say they are committing to emerging markets because key macro fundamentals are flipping in their favour.For instance, inflation has fallen below advanced-economy levels — a rare reversal seen only once in the past 35 years — even as central banks keep interest rates an average 2.1 percentage points above developed-market levels.The advantage extends to external and fiscal fronts too. While emerging economies, on average, run current-account surpluses, richer nations sit in deficit. Budget gaps are similar across both groups, but growth in developing nations is far stronger, with output expected to expand about 2.5 percentage points faster this year.“It’s ironic that EMs, once seen as serial defaulters, are now the ones with primary surpluses and inflation under control, while developed markets are running persistent fiscal deficits,” said Marco Ruijer, a fund manager at William Blair.Nowhere is the change as stark as in the US, where President Donald Trump’s trade and taxation policies are forecast to significantly expand US deficits. Government debt now tops 100% of annual output, the US budget deficit equates to almost 6% of GDP, and annual debt-servicing costs surpassed $1tn for the first time ever.“If someone didn’t tell you the country and they showed you the US metrics, you wouldn’t want to touch that with a 10-foot pole, it’s so horrible,” said Erik Weisman, a fund manager at $660bn MFS Investment Management. “You could say something similar about the UK or France.”Weisman runs a developed-market portfolio but is using his flexible mandate to buy high-grade emerging debt at the expense of G-10 peers.Recent months have brought several examples of risk convergence with the US. In October, investors accepted a yield premium of 17 basis points over Treasuries for South Korea’s five-year dollar bonds, a record low.And no wonder: The country’s debt-to-GDP ratio is projected at 55% this year — half the G7 average — and it’s running a 6% current-account surplus. LINKSimilarly, Abu Dhabi sold 10-year bonds at 18 basis points over Treasuries — the tightest spread ever for that maturity in emerging markets. And China priced its three-year dollar sale bang in line with Treasuries, erasing the premium investors had demanded last year.That some emerging bonds now trade flat or inside similar-duration Treasuries is a sign there’s real demand for diversification, according to Nick Eisinger, head of EM sovereign strategy at JPMorgan Asset Management.“High-quality EM countries have been structurally improving for years, and the market is finally waking up to it,” Eisinger said. 

The US dollar is heading for its biggest weekly drop in four months, as trading volumes shrink because of the US Thanksgiving holiday - pushing traders to focus on next year's outlook, while the Federal Reserve (the US central bank) appears to be the only party likely to take interest-rate-cut steps.In currency markets, the Japanese yen rose 0.4 percent to 155.87 per dollar in Asian trading, while the euro climbed above USD 1.16.The New Zealand dollar also rose to a three-week high of USD 0.5728, gaining about 2 percent, while the Australian dollar strengthened after inflation data that came in higher than expected.The Chinese yuan stood at 7.08 per dollar, while the British pound reached its highest level since late October at USD 1.3265, heading for its biggest weekly rise since last August.Meanwhile, the US Dollar Index - which measures the performance of the US currency against a basket of major currencies - was steady at 99.433 points, after retreating from its six-month high reached a week earlier, and is heading toward its largest weekly drop since July. 

The Japanese yen’s renewed weakness is testing the patience of policymakers in Tokyo and unnerving investors.The currency fell to 154.79 against the dollar on November 12, its lowest level in around nine months, following recent declines largely prompted by the emergence of Sanae Takaichi as Japan’s new leader. Takaichi’s focus on boosting economic growth has fuelled expectations she will be reluctant to prod the Bank of Japan to raise interest rates — a move that would support the yen.If the central bank waits longer to increase borrowing costs, the government may be forced to wade into currency markets to prop up the yen. Officials have indicated they are keeping a close eye on currency market movements, a typical first step before direct intervention.While Japan is committed to international pacts that stipulate markets should determine exchange rates, the Group of 20 has acknowledged that excessive or disorderly currency moves can threaten economic and financial stability, giving members wiggle room to intervene when volatility spikes. Japanese officials insist it is sharp or disorderly movements — not any specific exchange-rate threshold — that trigger intervention.The question now is how far — or how quickly — the yen needs to fall before Tokyo steps in to protect it.Why is the yen’s weakness cause for concern?While the yen’s slide over the past decade or so has transformed Japan into an affordable travel destination for millions of foreign tourists and boosted the profits of the nation’s biggest exporters, its weakness has become acute.For an economy heavily dependent on imported energy and raw materials, the feeble yen drives up costs, fuelling inflation for households and squeezing margins for domestically focused businesses. The resulting cost-of-living crunch has already helped bring down two prime ministers.There’s another reason why Japan’s government may want to act. President Donald Trump has repeatedly criticised Japan for its weak currency, arguing it gives Japanese manufacturers an unfair trade advantage. That’s a point that came up in trade negotiations between the two nations.What is currency intervention?When a country’s central bank steps into the foreign exchange market with the intention of strengthening or weakening its currency, that’s known as direct intervention.In Japan’s case, the Finance Ministry decides when to act and the BOJ carries out the operation via a limited number of commercial banks. Japan will either buy yen or sell dollars to strengthen the local currency or sell yen and buy dollars to weaken it. The scale of the transactions depends on how much impact the ministry seeks and how quickly the market reacts.Where does the money come from?When Japan intervenes to prop up the yen, the dollars typically come from its foreign reserves in the form of cash or US Treasury holdings. As of the end of October, Japan had $1.15tn in foreign currency. During last year’s interventions, for example, Japan appeared to sell some US Treasuries from its reserves to help finance the action.How effective is currency intervention?Intervention is a clear way for the government to tell speculators it won’t allow its currency to go into free fall or rocket up. However, it only offers a temporary fix unless economic fundamentals driving the trend are also addressed. In addition, foreign reserves are generally there to protect the economy in the event of a major financial shock or unexpected event, not to artificially prop up the currency. A unilateral move is still seen as unlikely to turn the tide of currency momentum, but it can buy time until market dynamics change.How often does Japan intervene in its currency market?Japan has exchanged vast amounts of money over the years — usually to weaken the yen. But recent intervention has been in the opposite direction. The government spent a total of almost $100bn on yen-buying to prop up the currency in 2024. On each of the four occasions the exchange rate was around 160 yen per dollar, setting that level as a rough marker for where action might take place again.To keep traders guessing, officials often don’t immediately confirm an intervention. But the ministry discloses the amount spent on intervention at the end of each month. Generating doubt and fear of losses in the market is part of the ministry’s strategy, making the comments of officials highly potent.What is verbal intervention?To keep traders on guard and slow movements in markets, senior officials can make remarks that hint at the prospect of intervention and bloody noses for market players. Comments by the finance minister or the ministry’s top currency official can quickly scare speculators. Officials typically use a carefully calibrated set of expressions to ratchet up their warnings and show how close they are to moving. References to “taking action” suggest intervention is close.What are the flow-on effects of monetary intervention?When Japan’s authorities intervene in currency markets, the immediate impact is typically sharp. Past episodes show the yen jumping around 2 yen against the dollar within seconds and 4 to 5 yen within hours.These abrupt swings can cause huge losses for traders making speculative bets that the currency will keep moving in the previous direction. Sharp moves can also cause headaches for businesses trying to price goods, make payments and hedge against exchange rate fluctuations.For the government, intervention also carries political and diplomatic risks. It can draw criticism for currency manipulation, especially when intervention is aimed at weakening the yen, a direction that can help exporters with trade. That charge is harder to argue when Tokyo acts to support the yen.What is the US stance on a weak yen?Trump accused Japan’s leaders of guiding the yen lower to gain a competitive advantage in early March and said tariffs were the solution. Japan remains on the US Treasury Department’s “monitoring list” for foreign-exchange practices after posting trade and current account surplus against US, but doesn’t fulfil all the conditions to be characterised as a currency manipulator.Tokyo and Washington issued a joint statement in September, in which the two finance chiefs reaffirmed that intervention “should be reserved for dealing with excess volatility or disorderly movements” and not for competitive advantage. Still, Treasury Secretary Scott Bessent on October 7 said Japan’s government needed to give the central bank space to manage volatility — comments seen as a warning against excessive weakness in the yen.Any intervention would take place after prior notice to the US and if it ended up strengthening the yen, it may be tacitly welcomed by the Trump administration.

The US dollar index, which measures the performance of the US currency against the euro, the British pound, the yen, and three other major currencies, stabilized at 100.18 after rising to 100.25, its highest level since August 1. Both the Japanese yen and the US dollar attracted strong demand as safe-haven assets amid heavy selling in stocks, particularly technology shares on Wall Street, which extended to Asian markets.The yen rose by about 0.2% to 153.42 per dollar, continuing the gains of 0.7% it recorded on Tuesday. At the same time, the dollar was steady at 1.1483 against the euro after rising 0.3% in the previous session to reach a seven-month-high.The British pound stabilized at $1.3016 after falling 0.9% yesterday. The New Zealand dollar slipped 0.1% to $0.5635 after a 1.2% decline yesterday, touching its lowest level in seven months. It also fell to 1.1512 against the Australian dollar following labor market data, a level not seen since October 2013.The Australian dollar dropped 0.2% to $0.6476.

The US dollar index edged lower on Wednesday after a three-day rally, as the greenback retreated during Asian trading amid market volatility triggered by a sharp fall in gold prices, which rebalanced flows across safe-haven assets. The dollar was last down 0.1% at 151.74 yen, after data showed that Japan's exports rose in September for the first time in five months. The dollar index, which measures the performance of the US currency against six major peers, stood at 98.84, down 0.1%. The euro rose 0.1% to $1.1613, while the pound sterling was steady at $1.3379. The Australian dollar gained 0.2% to $0.6503, and the New Zealand dollar also advanced 0.2% to $0.5753.

The dollar took a breather on Thursday after a strong run this week that has put it on track for its best performance in nearly a year, helped by a weak yen that has struggled amid a change of guard in Japan's ruling party. The Japanese currency was last a touch stronger at 152.49 per dollar, after having slid to an eight-month low of 153 per dollar overnight. The euro is also under pressure due to the escalating political crisis in France following the shocking resignation of Prime Minister Sebastien Lecornu and his government, although French President Emmanuel Macron is expected to appoint a new prime minister within 48 hours. The moves in the yen and the euro have in turn provided support for the dollar, which is up more than 1% for the week. Sterling rose 0.07% to $1.3413, after having touched a roughly two weeks previous session, while the Australian dollar was last up 0.11% at $0.6594. The New Zealand dollar rose 0.1 % to $0.5792, after falling in the previous session following the Reserve Bank of New Zealand's 50 basis point interest rate cut. Against a basket of currencies, the dollar was little changed at 98.77.

The US dollar climbed to a two-month-high in early Asian trading on Wednesday, as mounting risks surrounding the US government shutdown stoked investor anxiety and lifted demand for safe-haven assets. The dollar index, which tracks the greenback against six major peers, rose 0.3% to 98.91, its strongest level since August 5. The New Zealand dollar weakened as much as 1% to $0.5739 after the Reserve Bank of New Zealand unexpectedly cut interest rates by 50 basis points, signaling the possibility of further monetary easing amid worsening economic indicators. The Australian dollar slipped 0.4% to $0.6559, while the dollar strengthened 0.4% against the yen to 152.54, hovering near its highest level since February. Meanwhile, the euro declined 0.3% to $1.1618 and the British pound fell 0.2% to $1.3395. The offshore Chinese yuan eased 0.1% from the previous session to 7.1506 per dollar.

The dollar index, which measures the greenback against a basket of currencies, added 0.05% to 98.17. While the yen weakened to a two-month low against the dollar. The yen lost 0.2% to 150.59 per dollar and earlier touched 150.62, the weakest level since August 1. Japan's currency also skidded to 176.35 per euro. The euro was little changed at $1.1705. The euro slid against the dollar and the pound in the previous session after France's new Prime Minister Sebastien Lecornu and his government resigned on Monday.

The dollar sank to a one-week low versus major peers on Wednesday as the US government entered a shutdown that is likely to delay the release of crucial jobs data. The dollar index, which gauges the currency against six counterparts including the euro and yen, declined 0.2% to 97.635, and earlier dipped to 97.584 for the first time since last Wednesday. The euro rose as much as 0.3% to $1.1767, the highest since September 24. The dollar slipped 0.3% to touch 147.46 for the first time since September 19, adding to a three-day, 1.2% slide.

The US dollar fell on Tuesday as investors braced for a possible US government shutdown that would delay release of the crucial jobs report this week, while the Australian dollar rose after the central bank struck a cautious tone on inflation. The Aussie gained 0.49% to $0.66075 after the Reserve Bank of Australia held rates steady as expected. The broader US currency index dropped 9.7% this year, at 97.928. The euro was a shade lower at $1.172, while sterling was at $1.3436. Benchmark 10-year Treasury yields were little changed at 4.142%, after dropping 4.6 bps on Monday. They have dropped 8.3 bps for the month.

The Iranian rial plummeted to a record low against the US dollar on Sunday after the reinstatement of United Nations sanctions, according to currency-tracking websites.On the black market, the rial was trading at around 1.12 million rials against the dollar, the Bonbast and AlanChand websites reported, about a month after it had been slightly above one million rials to the greenback.