USD/CHF corrects to near 0.8000 as FOMC minutes signal further interest rate cuts
- USD/CHF drops from its monthly high to near 0.8000 as the US Dollar corrects.
- FOMC minutes signaled more interest rate cuts by the Fed in the remainder of the year.
- The SNB is unlikely to push interest rates into a negative territory.
The USD/CHF pair retraces to near 0.8000 during the late Asian trading session on Thursday from the monthly high of 0.8030 posted the previous day. The Swiss Franc pair corrects as the US Dollar (USD) struggles to extend its upside move, following the release of the dovish Federal Open Market Committee (FOMC) minutes for the September policy meeting on Wednesday.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.1% lower to near 98.70. The DXY posted a fresh two-month high near 99.00 on Wednesday on the deepening political crisis in France.
The FOMC minutes showed that it is appropriate to loosen monetary policy conditions in the remaining 2025 as “downside risks to employment have increased, while upside risks to inflation have either diminished or not increased”. The Fed’s dot plot of the September meeting also showed that policymakers collectively see the Federal Fund Rate falling to 3.6% by the year-end, suggesting two more interest rate cuts this year.
According to the CME FedWatch tool, traders remain extremely confident that the Fed will cut interest rates again in the policy meeting later this month and see a 78.6% chance of one more in the December meeting.
Going forward, investors will focus on the speech from Fed Chair Jerome Powell at the Community Bank Conference in Washington, which is scheduled at 12:30 GMT.
In the Swiss region, investors remain cautious about whether the Swiss National Bank (SNB) will push interest rates into a negative territory. Latest comments from SNB Chairman Martin Schlegel have signaled that consumer inflation expectations could accelerate in the coming quarters, a scenario that could be a drag on market expectations for the Swiss central bank to favour an ultra-dovish monetary policy stance. Schlegel also warned that negative interest rates could be bad for pensioners and financial institutions.
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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