USD/CHF edges higher on Wednesday, hovering near its highest level in more than a year as hawkish Federal Reserve (Fed) expectations contrast with a steady Swiss National Bank (SNB) outlook, weighing on the Swiss Franc (CHF). At the time of writing, the pair trades around 0.8204, extending its gains for an eighth consecutive day.
The US Dollar (USD) stays well supported ahead of the Fed’s interest-rate decision at 18:00 GMT. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.45, rebounding from an intraday low of 101.24.
The Fed is widely expected to leave borrowing costs unchanged within the 3.50%-3.75% range, although traders are also bracing for the possibility of a surprise hike amid heightened energy-driven inflation risks. According to the CME FedWatch Tool, markets price in around a 30% chance of a 25-basis-point increase.
Oil prices rebounded sharply on Wednesday after Iran launched missiles at a US military base in Jordan, ending a brief pause in the fighting. US President Donald Trump later threatened retaliatory strikes against Tehran, dimming hopes that shipping through the Strait of Hormuz would return to normal anytime soon.
The war in the Middle East also supports demand for the US Dollar. Although the Swiss Franc is traditionally viewed as a safe-haven currency, Switzerland’s zero interest-rate policy is overshadowing its appeal, prompting investors to favour higher-yielding currencies.
Analysts at Commerzbank note that, although inflation has picked up again in Switzerland in recent months, “the rise has been smaller than expected.” They argue that “the exchange rate effect is smaller than is often assumed,” helping to explain why price pressures remain contained.
Against this backdrop, Commerzbank says it “stand[s] by our forecast that inflation is likely to increase only slightly, if at all,” and stresses that this “relatively subdued inflationary pressure is one of the main reasons for our long-standing forecast that the SNB will leave interest rates unchanged until the end of 2027.”
Fed FAQs
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.
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.
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.
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.
Read the full article here
