USD/CHF falls to near 0.7760 as US Dollar’s rally hits pause

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The USD/CHF pair trades 0.22% lower to near 0.7765 during the late Asian trading session on Friday. The Swiss Franc pair is under pressure as the rally in the US Dollar (USD) has paused, following an increase in dovish Federal Reserve (Fed) expectations.

USD/CHF drops to near 0.7765 as the US Dollar corrects amid increase in dovish Fed expectations.
Weak US job data has prompted expectations of Fed interest rate cuts in March.
The SNB is unlikely to make any monetary policy adjustment in the near term.

During the press time, the US Dollar Index (DXY), which gauges the Greenback’s value against six major peers, is down 0.2% to near 97.75.

According to the CME FedWatch tool, the possibility of the Fed reducing interest rates by 25 basis points (bps) to 3.25%-3.50% in the March meeting has improved to 22.7% from 9.4% seen on Wednesday.

Trades raise dovish Fed bets as latest United States (US) job market-related data showed signs of continued slowdown in the labor demand. On Thursday, the US JOLTS Job Openings data for December showed that US employers posted 6.542 million fresh job vacancies, significantly lower than estimates of 7.2 million and the previous reading of 6.928 million.

Meanwhile, the ADP reported on Wednesday that the private sector hired 22K fresh workers in January, fewer than 37K in December.

In the Swiss region, investors seek fresh cues on the Swiss National Bank’s (SNB) monetary policy outlook. The SNB is likely to hold interest rates at 0% in the near term as they remain concerned over soft inflationary pressures. Earlier this week, SNB Chairman Martin Schelegl said, “My greatest concern is of course inflation and price stability, and we [SNB] do everything we can to ensure that,” Reuters reported.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.