USD/CHF gains slightly to near 0.7940, investors await Fed’s policy
- USD/CHF rises marginally to near 0.7940 as the US Dollar gains ahead of the Fed’s policy.
- Investors expect the Fed to cut interest rates by 25 bps to 3.75%-4.00%.
- This week, the major trigger for the global market will be the Trump-Xi meeting on Thursday.
The USD/CHF pair rises slightly to near 0.7940 during the late Asian trading session on Wednesday. The Swiss Franc pair gains as the US Dollar (USD) trades marginally higher ahead of the monetary policy announcement by the Federal Reserve (Fed) at 18:00 GMT.
At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.16% higher to near 98.85.
Traders are confident that the Fed will cut interest rates by 25 basis points (bps) for the second time in a row, which will push them lower to 3.75%-4.00%, according to the CME FedWatch tool. Reasons behind firm Fed dovish bets are cooling United States (US) inflation growth, soft job market, and ongoing federal shutdown.
In the monetary policy announcement, investors would pay close attention to the interest rate outlook and the current status of the labor market amid the absence of economic data releases. The CME FedWatch tool also shows that traders have priced in a 25-bps reduction in interest rates in the December policy meeting.
Globally, investors await the meeting between US President Donald Trump and Chinese leader Xi Jinping, which is scheduled on Thursday in South Korea. Both leaders are expected to discuss fentanyl-related tariffs, rare earth export controls, and Tiktok.
In Wednesday’s session, investors will also focus on the Swiss -ZEW Survey Expectations data for October, which will be published at 09:00 GMT. In September, the sentiment data improved to -46.4 from -53.8 in August.
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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