Swiss Franc gains ground as Japanese Yen-led weakness grips US Dollar
- USD/CHF retreats as Japanese Yen strength drags the US Dollar lower.
- Rising Oil prices keep inflation concerns and Fed rate hike bets in focus.
- US PPI and CPI data will help shape expectations for next week’s Fed meeting.
USD/CHF edges lower on Wednesday as broad weakness in the US Dollar (USD) allows the Swiss Franc (CHF) to regain some ground. At the time of writing, the pair trades around 0.8078, down roughly 0.20% on the day.
A sharp rally in the Japanese Yen (JPY) leads the Greenback’s decline, while the broader market mood remains shaped by the US-Iran war in the Middle East and the resulting rise in Oil prices. West Texas Intermediate (WTI) Oil trades around $93.50 per barrel, near its highest level since June 8.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 98.67, near its lowest level since August 21. The Greenback remains under pressure despite hawkish Federal Reserve (Fed) expectations, with elevated Oil prices further reinforcing the case for higher interest rates.
As a result, US Treasury yields remain elevated, with the benchmark 10-year yield trading around 4.80%, near its highest level since November 2023. The Treasury is expected to announce the size of its bond buyback at 15:00 GMT. The department said last month that it would purchase at least $4 billion of longer-term debt.
US inflation data now takes centre stage ahead of the Fed’s September 15-16 meeting, as policymakers have repeatedly stressed their commitment to bringing inflation back to the 2% target. The upcoming readings could play a key role in deciding whether the central bank raises interest rates.
The Producer Price Index (PPI) is due on Thursday, followed by the Consumer Price Index (CPI) on Friday. Hotter-than-expected inflation figures could strengthen expectations of a September Fed rate hike and help the US Dollar recover. Softer readings, on the other hand, could leave the Greenback vulnerable to further losses.
Even so, the Swiss National Bank’s (SNB) zero interest rate and its willingness to counter excessive appreciation in the Franc could limit the downside in USD/CHF.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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