USD/CHF trades cautiously near 0.8060 as US CPI weighs on Greenback
- USD/CHF struggles to gain ground as the US Dollar underperforms amid firm Fed’s interest rate cut bets.
- The US core CPI grew at a faster pace of 3.1% in July.
- Swiss inflation rose 0.2% on year in July.
The USD/CHF pair trades with caution around 0.8060 during the late Asian session on Wednesday. The Swiss Franc pair is under pressure as the US Dollar (USD) has been battered by accelerated expectations that the Federal Reserve (Fed) could resume its monetary expansion cycle from the September meeting.
At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades cautiously near the two-week low around 98.00.
According to the CME FedWatch tool, the probability of the fed to cut interest rates in the September meeting has increased to 94% from almost 86% recorded on Monday.
Traders raise Fed dovish bets as the US CPI report didn’t show any signs of a significant pass-through of tariff-impact into prices. However, price pressures rose almost in-line with expectations. The headline inflation grew at a steady pace of 2.7% on year, slower than expectations of 2.8%. While, the core CPI – which excludes volatile food and energy items – rose at a faster pace of 3.1%, compared to expectations of 3% and the prior reading of 2.9%.
Meanwhile, traders look fresh cues about whether the Swiss National Bank (SNB) will push interest rates to the negative territory in the policy meeting next month. In the Swiss economy, inflation has remained well-below the SNB’s tolerance rate of 2%. Swiss CPI report showed last week that price pressures rose at an annual pace of 0.2%, faster than expectations and the prior reading 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.