Swiss Franc eases as US Dollar stabilizes after last week’s sell-off
- USD/CHF rises modestly as the US Dollar Index reclaims the 99.00 mark.
- US-Iran tensions return to focus after Washington launches a fresh sanctions campaign.
- Attention shifts to PCE inflation and Fed Chair Kevin Warsh’s Jackson Hole speech.
USD/CHF edges higher on Monday as the US Dollar (USD) steadies after last week’s sell-off sparked by the US Treasury’s announcement to increase longer-dated bond buybacks. Market attention has now shifted back to US-Iran tensions after Washington unveiled a fresh sanctions campaign against Tehran. At the time of writing, the pair trades around 0.8026, up roughly 0.20% on the day.
US Treasury Secretary Scott Bessent launched “Operation Economic Outcast” on Monday to tighten economic pressure on Iran. The operation expands the scope of secondary sanctions targeting entities and countries that transact with Iran. The Treasury sanctioned around 60 Iran-linked individuals, entities and vessels tied to the country’s nuclear, missile, cyber and Oil networks.
Iran has warned that the tougher pressure could lead to a wider confrontation, with a senior Iranian official threatening to halt Oil exports through the Strait of Hormuz and elsewhere in the Persian Gulf.
Geopolitical tensions are keeping a floor under the US Dollar, although the upside appears limited. The US Treasury’s move to increase longer-dated bond buybacks has revived concerns over the country’s fiscal outlook and rising government debt. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades around 99.05 on Monday after falling to a three-month low of 98.56 last week.
At the same time, softer US employment and inflation data for July have dampened expectations of a near-term Federal Reserve (Fed) interest-rate hike, creating another headwind for the US Dollar.
Market attention will turn to the US Personal Consumption Expenditures (PCE) Price Index on Wednesday. The report could provide fresh clues on the inflation outlook and help cement expectations that the Fed will leave interest rates unchanged at its next monetary policy meeting. Later in the week, Fed Chair Kevin Warsh is scheduled to speak at Jackson Hole on Friday.
On the Swiss side, the calendar is quiet this week. Inflation remains subdued, with annual CPI at 0.4% in July, near the lower end of the Swiss National Bank's (SNB) 0%-2% price-stability range. SNB Governing Board member Petra Tschudin said last week that negative interest rates could be used again if needed to keep inflation within that range.
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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