USD/CHF holds onto Wednesday’s recovery move near 0.7950 in risk-on market
- USD/CHF trades firmly near 0.7950 as the US Dollar holds Wednesday’s gains.
- Market sentiment turns risk-on as US-EU disputes cool down.
- SNB’s Schlegel warns of negative inflation prints this year.
The USD/CHF pair clings to Wednesday’s recovery move near 0.7950 during the late Asian trading session on Thursday. The Swiss Franc pair rebounded after correcting sharply in January 19-20 as the US Dollar (USD) attracted bids, following United States (US) President Donald Trump’s speech at the World Economic Forum (WEF) in Davos.
As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near Wednesday’s high around 98.80.
US President Trump confirmed that he will not call military action and tariff threats on European Union (EU) members to acquire Greenland. Trump also announced the removal of 10% tariffs imposed on several EU members and the United Kingdom (UK) after meeting with Secretary General of NATO, Mark Rutte, and added that they have reached a framework of a “future deal with respect to Greenland, and in fact, the entire Arctic Region”.
Receding US-EU geopolitical and trade tensions have boosted investors’ risk appetite, leading to a broad-based rally in global markets. S&P 500 futures trade higher during late Asian hours, extending strong upside on Wednesday.
Meanwhile, the Swiss Franc (CHF) trades broadly calm, but underperforming antipodeans, even as Swiss National Bank (SNB) Chairman Martin Schlegel has warned of negative inflation in the near term. Speaking at the WEF on Wednesday, Schlegel said that the possibility of “negative inflation prints this year” is high, but a few months of negative inflation “wouldn't be a problem”.
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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