USD/CHF ticks down to near 0.7950 despite recovery in US Dollar
- USD/CHF trades subduedly around 0.7950 despite a decent recovery move in the US Dollar.
- The US Dollar gains ahead of the US Senate’s fifth time voting on the stopgap bill.
- SNB’s Schlegel is confident that inflation will accelerate in the coming quarters.
The USD/CHF pair edges down to near 0.7955 during the late Asian trading session on Monday. The Swiss Franc pair faces slight selling pressure even as the US Dollar (USD) recovers firmly, suggesting significant strength in the Swiss Franc (CHF).
The Swiss currency attracts bids as Swiss National Bank (SNB) Chairman Martin Schlegel has expressed confidence that inflationary pressures could accelerate in the coming quarters. “Inflation is expected to rise slightly in the coming quarters,” Schlegel said last week, but cited that US pharma tariffs have raised “downside” risks a bit.
The scenario of rising inflation expectations diminishes fears of the SNB pushing interest rates into a negative territory. SNB’s Schlegel has already warned that negative borrowing rates could be unfavorable for pensioners and financial institutions.
At the start of the week, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, jumps 0.3% to near 98.00 during late Asian trading hours.
The US Dollar gains even as Washington faces the risk of mass lay-offs in the wake of a partial government shutdown. The US Senate is scheduled to meet on Monday to vote on passing the short-term funding bill. This will be the fifth time that Senators vote on the stopgap bill, which has already been passed by the House of Representatives.
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.