Swiss Franc gives back some early gains against US Dollar, US CPI in focus
- The Swiss Franc gives up some of its gains against the US Dollar.
- Oil prices recover amid fears of a prolonged US-Iran war.
- Investors await the US CPI data for June, which will be released next week.
The Swiss Franc (CHF) pares some of its early gains against the US Dollar (USD) during the early European trading session on Friday. The USD/CHF pair is 0.26% lower at around 0.8048 even after a slight recovery move.
The Swiss Franc pair surrenders some gains as the US Dollar attracts slight bids amid a recovery in oil prices. At press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades 0.14% lower to near 100.80 after revisiting the three-week low of 100.60 earlier in the day.
Oil prices corrected sharply on Thursday after a United States (US) official confirmed that technical talks with Iran are still on despite President Donald Trump declaring the collapse of the memorandum of understanding (MoU).
However, continued exchange of attacks between the US and Iran have resurfaced fears of energy supply disruption, a scenario that could prompt the US inflationary pressures further.
To get cues regarding the current status of US inflation, investors await the Consumer Price Index (CPI) data for June, which will be released on Tuesday. The data is expected to show that the core CPI – which excludes volatile items such as food and oil – grew at a steady pace of 2.9% Year-on-Year (YoY).
On the Swiss Franc front, the currency trades higher against its major peers, except the Japanese Yen (JPY) amid a cautious market mood.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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