USD/CHF trades cautiously near 0.8000 as Fed dovish speculation intensifies

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The USD/CHF pair trades with caution around 0.8000 during the late Asian trading session on Wednesday. The Swiss Franc pair faces selling pressure as the US Dollar (USD) falls on the back foot amid growing expectations that the Federal Reserve (Fed) could cut interest rates again this year.

USD/CHF struggles to hold its key support level of 0.8000 on accelerating Fed dovish bets.
The SNB is unlikely to shift to negative interest rates.
The US-Swiss trade deal could be announced in two weeks, Bloomberg reported.

During the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges higher to near 99.55. Still, the USD Index is close to its weekly low of 99.30 posted on Tuesday.

The US Dollar declined on Tuesday after the release of the ADP Employment Change four-week average data, which prompted Fed dovish expectations. Private payroll processor ADP reported that employers laid off 11.25K workers each week through late October. Weakening US job trend has raised concerns over the current status of the labour market.

According to the CME FedWatch tool, the probability of the Fed to cut interest rates by 25 basis points (bps) to 3.50%-3.75% in the December meeting has increased to 68% from 62.4% seen on Monday.

Meanwhile, the Swiss Franc (CHF) trades firmly amid receding expectations that the Swiss National Bank (SNB) could shift to negative interest rates. SNB officials have lately expressed confidence that inflation could accelerate in coming quarters.

On the global front, the United States (US) and Switzerland are close to signing a trade deal in two weeks. A Bloomberg’s report showed this week that the US and the Swiss economy could announce a trade deal in two weeks, in which Washington is expected to reduce tariffs on imports from Switzerland to 15%.

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.