USD/CHF extends recovery to near 0.7900 as US Dollar gains ground
- USD/CHF rebounds further to near 0.7900 as the US Dollar bounces back, following Fed policy’s announcement.
- The Fed reduced interest rates by 25 bps and signals two more this year at a similar pace.
- Investors await key US Initial Jobless Claims data for the week ending September 12.
The USD/CHF pair recovers further to near 0.7900 during the late Asian trading session on Thursday. The Swiss Franc pair bounces back as the US Dollar (USD) gains ground after the monetary policy announcement by the Federal Reserve (Fed) on Wednesday.
During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, extends Wednesday’s recovery move to near 97.15.
However, the outlook of the US Dollar remains uncertain as the Fed has signaled two more interest rates in the remainder of the year after cutting them by 25 basis points (bps) to 4.00%-4.25%. The Fed stated that monetary policy adjustments became appropriate due to weakening United States (US) labor market conditions.
Fed Chair Jerome Powell warned of slowing US labor demand in his press conference, following the monetary policy announcement and acknowledged that that job market has lost strength. “Can no longer say labor market is solid,” Powell said.
In Thursday’s session, investors will focus on Initial Jobless Claims data for the week ending September 12, which will be published at 12:30 GMT. Investors will closely monitor jobless claims data as Fed dovish speculation intensified last week after it showed the highest reading in four years.
In the Swiss economy, traders await a key trigger to know whether the Swiss National Bank (SNB) will push interest rates into the negative territory amid downside inflation risks. The consumer inflation in the Swiss economy is growing at a moderate pace of 0.2% on an annualized basis from past two months.
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.