A closely watched rate for borrowing Japanese yen—the yen’s three-month benchmark London interbank offered rate, or Libor—fell below its U.S. dollar counterpart Thursday for the first time in six months. Libor is a key gauge of liquidity in short-term funding markets and a benchmark rate for short-term borrowing by companies and consumers.
That bout of dollar weakness ended in December as market players began betting that the U.S. Federal Reserve Board will raise interest rates later this year or in early 2011 as the U.S. economy recovers and fears rise that easy credit could lead to bubbles down the road. That contrasts with expectations that the Bank of Japan will keep its policy rate at ultra-low levels as it fights deflation in the world’s second-largest economy.
Prices of Fed-funds futures also fell Thursday, indicating rising expectations among market participants that the U.S. central bank will hike its benchmark rate late in the year. The November fed-funds contract priced in a 70% chance that the Fed will lift the fed-funds rate to 0.5% from the current range of 0.0%-0.25% at its early November policy meeting.