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USD/CHF struggles near 0.7920 even as traders trim dovish Fed bets

  • USD/CHF edges lower to near 0.7920 despite traders trimming Fed dovish bets.
  • Fed officials stressed maintaining slight restrictiveness in the monetary policy as inflation is well above target.
  • Swiss Producer and Import prices surprisingly declined by 0.3% in October.

The USD/CHF pair ticks down to near 0.7920 during the late Asian trading session on Friday. The Swiss Franc pair struggles to gain ground after revisiting an over three-week low of 0.7910 posted on Thursday. The pair is under pressure as the US Dollar (USD) underperforms even as traders have trimmed bets supporting an interest rate cut by the Federal Reserve (Fed) in the December policy meeting.

During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges lower to near 99.15. The USD Index remains close to its two-week low of 99.00 posted on Thursday.

According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 basis points (bps) to 3.50%-3.75% in the December meeting has diminished to 50.7% from 63% seen on Thursday.

Fed dovish bets have receded as few Federal Open Market Committee (FOMC) members have been stressing the need to exercise caution on interest rate cuts as inflationary pressures remain well above the central bank’s 2% target.

“Policy closer to neutral than modestly restrictive, and the Fed needs to continue to lean against inflation," St. Louis Fed President Alberto Musalem said at the Economic Impact & Policy Forum hosted by the University of Evansville, in Indiana, on Thursday.

Meanwhile, the Swiss Franc trades broadly firm as Swiss National Bank (SNB) officials have expressed confidence that inflation will increase in the coming quarters. Contrary to officials’ guidance, Swiss Producer and Import Prices data for October have come in surprisingly negative. Inflation at the wholesale level declined at a faster pace of 0.3% month-on-month against a 0.2% drop in September. Economists expect the producer inflation to have risen by 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.

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Author

Sagar Dua

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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