- USD/CHF regains some positive traction amid the emergence of some USD buying on Monday.
- Expectations of further rate cuts by the Fed and rising tensions in the Middle East are limiting the pair’s gains.
- Traders may also prefer to wait on the sidelines ahead of US inflation figures this week.
The USD/CHF pair is attracting some dip-buying during the Asian session on Monday and is currently trading around the 0.8660-0.8665 region, just below last week’s high.
The US Dollar (USD) starts the new week on a positive note following hawkish comments from Federal Reserve (Fed) Governor Michelle Bowman on Sunday. Bowman noted that the Fed may not be ready to cut rates in September and still sees upside risks to inflation amid continued strength in the labor market. Apart from this, a generally positive tone around the stock markets weighs on the safe-haven Swiss Franc (CHF) and offers some support to the USD/CHF pair.
That said, geopolitical risks stemming from ongoing conflicts in the Middle East keep a lid on market optimism. Indeed, the Israel Defense Forces (IDF) intercepted approximately 30 projectiles that were identified crossing from Lebanon into northern Israel early Monday morning. In addition, the Israeli Air Force and Military Intelligence Directorate have been put on high alert following sightings in western Iran, suggesting that Iran could attack Israel in the coming days.
Apart from this, expectations of further interest rate cuts by the Fed could restrain USD bulls from placing aggressive bets and help limit the upside of the USD/CHF pair. Traders also seem reluctant and might prefer to stay on the sidelines ahead of the release of the latest US inflation figures this week – the Producer Price Index (PPI) and the Consumer Price Index (CPI) on Tuesday and Wednesday, respectively.
Meanwhile, the fundamental backdrop makes it prudent to wait for some follow-through buying before positioning for an extension of the USD/CHF pair’s recent recovery move from the 0.8430 area, or the lowest level touched in early January last week.
US Dollar FAQs
The United States 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 in circulation alongside local banknotes. As of 2022, it is the most traded currency in the world, accounting for over 88% of all global foreign exchange transactions, equivalent to an average of $6.6 trillion in transactions per day. Following World War II, the USD took over from the British Pound as the world’s reserve currency.
The single most important factor influencing the value of the US dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and to promote full employment. Its main tool for achieving these two goals is to adjust interest rates. When prices rise too quickly and inflation exceeds the Fed’s 2% target, the Fed raises rates, which helps the dollar. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the 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 jammed financial system. It is an unconventional policy measure used when credit has dried up because banks are not lending to each other (for 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 of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE typically leads to a weakening of 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 of maturing securities in new purchases. It is generally positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
