USD/CHF holds onto gains near monthly high around 0.8070 amid upbeat US Dollar
- USD/CHF trades firmly near the monthly high of around 0.8070.
- The Fed is expected to deliver two more interest rate cuts this year.
- The SNB is less likely to push interest rates into a negative territory.
The USD/CHF pair clings to gains in Friday’s late Asian session near a fresh monthly high around 0.8070 posted on Thursday. The Swiss Franc pair traders firmly as the US Dollar (USD) has stretched its rally despite upbeat expectations that the Federal Reserve (Fed) will cut interest rates further in the remaining year.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, holds onto gains near the two-month high around 99.50 posted on Thursday.
According to the CME FedWatch tool, traders see an 81.5% chance that the Fed will cut interest rates by 25 basis points (bps) in each of its remaining two monetary policy meetings this year.
Fed dovish bets have remained upbeat as latest commentaries from members of the Federal Open Market Committee (FOMC) have signaled that they have become more concerned about downside labour market risks, while remaining confident that consumer inflation expectations are anchored.
On Thursday, New York Fed Bank President John Williams warned of labour market risks, citing that companies hesitate to hire new workers, which underscores the need for more interest rate cuts this year, The New York Times (NYT) reported.
In Friday’s session, investors will focus on the preliminary Michigan Consumer Sentiment Index and Consumer Inflation Expectations data for October, which will be published at 14:00 GMT.
In the Swiss economy, growing expectations of inflation rising in the coming quarters are diminishing fears that the Swiss National Bank (SNB) could push interest rates into a negative territory. Latest comments from SNB Chairman Martin Schlegel have signaled that consumer inflation could accelerate in the coming quarters.
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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