USD/CHF rebounds as Warsh nomination and hot PPI support the US Dollar

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USD/CHF rebounds as markets reassess the Fed outlook after Trump backs Kevin Warsh to lead the central bank.
Markets view Warsh as a relatively hawkish choice, easing fears of aggressive rate cuts.
Markets digest mixed Fed rhetoric, with Waller arguing policy is too restrictive while Bostic calls for patience.

The Swiss Franc (CHF) weakens against the US Dollar (USD) on Friday, as traders reassess the Federal Reserve (Fed) outlook following fresh signals from US President Donald Trump on the future leadership of the central bank. At the time of writing, USD/CHF is trading around 0.7717, rebounding after slipping to its lowest level since August 2011 near 0.7604 earlier this week.

Earlier on Friday, Donald Trump named former Fed Governor Kevin Warsh as his preferred candidate to lead the central bank. If confirmed by the Senate, Warsh would succeed current Chair Jerome Powell, whose term is set to expire in May.

Investors had initially feared that President Trump’s pick could tilt the Fed toward a more dovish policy path, given his repeated public calls for lower interest rates. However, markets have so far interpreted Kevin Warsh’s nomination as a relatively more hawkish choice, helping to ease concerns about the risk of aggressive rate cuts.

Warsh, who previously served as a Fed Governor, is widely viewed as a policy insider, a factor that has also helped calm part of the recent debate over the Fed’s independence, especially compared with other candidates that had reportedly been under consideration.

This shift in sentiment has lifted the Greenback across the board. The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, is trading around 96.94, rebounding after hitting a four-year low near 95.56 earlier this week.

Further support for the US Dollar comes from hotter-than-expected US Producer Price Index (PPI) data, with headline producer prices rising 0.5% MoM in December, up from 0.2% in November and above forecasts, while the annual rate held at 3.0%, beating expectations of 2.7%.

Meanwhile, core PPI surged 0.7% MoM, sharply above the 0.2% consensus and the prior flat reading, lifting the yearly core measure to 3.3% from 3.0%, also above estimates of 2.9%.

Traders also digested remarks from Fed officials. Fed Governor Christopher Waller said he dissented in favour of a 25-basis-point cut at the last meeting, arguing that policy remains too restrictive and should move closer to a neutral level near 3%, versus the current 3.50%-3.75% range.

Atlanta Fed President Raphael Bostic said the central bank should remain patient for now and needs clear evidence that inflation is returning to the 2% target.

Looking ahead, traders await Swiss Real Retail Sales (YoY) for December and the SVME Manufacturing Purchasing Managers Index (PMI) for January on Monday, alongside the US Manufacturing PMI.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.