USD/CHF gains ground below 0.8000 ahead of US tariff deadline
- USD/CHF trades calmly around 0.7950, while investors seek clarity on US’ new tariff rates.
- So far, the US has signed trade pact with the UK, Vietnam and China.
- The SNB could push interest rates into a negative territory.
The USD/CHF pair trades broadly stable around 0.7950 during Asian trading hours on Monday. The Swiss Franc pair wobbles as investors await clarity on the additional import rates, which the United States (US) is prepared to impose on its trading partners that fails to strike a trade deal during the 90-day reciprocal tariff pause, ending July 9.
At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks up to near 97.15.
However, the outlook of the US Dollar remains uncertain as a significant number of US trading partners are expected to face the tariff heat. So far, Washington has announced bilateral agreements with the United Kingdom (UK) and Vietnam and a limited trade pact with China.
The imposition of reciprocal tariffs by the US on a large number of its trading partners will disrupt the global trade and will be inflationary for the US economy. A scenario that will increase demand for safe-haven assets, such as the Swiss Franc.
Meanwhile, the White House has signaled that it will announce trade deals with more nations soon and new tariff rates will be imposed on nations from August 1. It has also clarified that the August 1 is not the new deadline but a time period for trade partners to renegotiate tariff rates.
In the Swiss region, the Swiss National Bank (SNB) will likely keep the door open for negative interest rates despite price pressures growing at a faster pace in June. Year-on-year Consumer Price Index (CPI) rose at a faster pace of 0.1%, while economists anticipated a steady decline of 0.1%.
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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