USD/CHF hits session lows sub-0.8000 amid generalised Dollar weakness
- The US Dollar depreciates below 0.8000 and approaches last week's low at 0.8988.
- Dovish comments by Fed Powell boosted hopes of Fed cuts and are weighing on the USD.
- Deflationary pressures in Switzerland are keeping the Swiss Franc from appreciating further.
The US Dollar is trading lower across the board as investors increase bets on Fed cuts. This is pulling the USD/CHF pair below the 0.8000 psychological level during Wednesday’s European session and approaching Friday’s lows at 0.7990.
The Greenback is losing ground across the board on Wednesday, as investors shifted their focus from the escalating Sino-US trading tensions to the Federal Reserve’s monetary policy, following dovish remarks by Fed Chair Jerome Powell on Tuesday.
Fed's Powell hints at further rate cuts
Powell emphasised the weak momentum of the labour market over the higher inflationary risks, practically confirming that the central bank will cut rates by 25 basis points in late October, and boosting hopes of another such cut in December.
Furthermore, the Fed chief affirmed that the bank is nearing the end of its balance sheet drawdown, the so-called “quantitative easing” programme, as, he assessed, some signs that liquidity conditions are gradually tightening have started to emerge.
In Switzerland, deflationary price data keeps fuelling expectations that the SNB might be forced to introduce negative rates again, which is keeping Swiss Franc upside attempts limited.
On Tuesday, the Swiss Producer Prices Index showed that inflation at factory gates contracted for the fifth consecutive month in September, dropping by 0.2% after a 0.6% decline in August and against market expectations of a 0.2% increase.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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