USD/CHF wobbles around 0.8060 while US federal reopening measure advances
- USD/CHF consolidates around 0.8060 as the US Dollar trades calmly while the US Senate advances a funding bill.
- The Fed is expected to cut interest rates again in December.
- The SNB is unlikely to turn to negative interest rates.
The USD/CHF pair trades in a tight range around 0.8060 during the European trading session on Monday. The Swiss Franc pair ranges as the US Dollar (USD) steadies after the United States (US) Senate advanced the federal funding bill until January.
At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, consolidates near 99.60.
During the day, eight Democratic lawmakers agreed to support the stopgap bill with Republicans in exchange for endorsing the extension of subsidies under the Affordable Care Act, which will be voted on in December.
The scenario of the US government reopening would allow the release of key economic data, such as Nonfarm Payrolls (NFP) and the Consumer Price Index (CPI), that would support investors in building expectations for the Federal Reserve’s (Fed) monetary policy outlook.
Currently, the CME FedWatch tool shows that the probability of the Fed cutting interest rates in the December meeting is 62.6%.
Meanwhile, the Swiss Franc (CHF) trades slightly higher against its major peers, except antipodeans, on hopes that the Swiss National Bank (SNB) will not push interest rates into the negative territory, as Chairman Martin Schlegel stated last week that inflation would accelerate in coming quarters. “Inflation should rise slightly in next quarters, and interest rates are expected to remain on hold for a long time,” Schlegel said.
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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