Dollar Strength Lifts USD/CHF Toward 0.7890 Outlook

Key Moments

USD/CHF Firms as Greenback Rebounds

USD/CHF climbed toward 0.7890 in early European trading on Friday. The move followed a rebound in the US Dollar after a sharp drop the day before. As a result, the pair recovered part of its earlier losses.

US Dollar Performance Against Major Currencies

Overall, the US Dollar showed mixed performance against major currencies. However, it stood out against the Japanese Yen, where it posted the strongest gains on the day.

In addition, the article referenced a table showing percentage changes across major currencies. A heat map also highlighted cross-currency moves. In this setup, the base currency appears on the left, while the quote currency sits at the top. For example, selecting the US Dollar and moving across to the Japanese Yen shows the USD/JPY percentage change.

Fed Policy Expectations Support the Dollar

Expectations around Federal Reserve policy supported the US Dollar. Investors now expect the Fed to hold rates steady through year-end. This outlook continues to support the Greenback.

According to the CME FedWatch tool, markets see a nearly 72% chance that the Fed keeps rates at or above 3.50%-3.75% in December. Consequently, US yields firmed, which helped stabilize the Dollar after the previous decline.

SNB Signals Willingness to Curb CHF Strength

On the Swiss side, the Franc remains sensitive to signals from the Swiss National Bank. The SNB has made it clear that it stands ready to act if the currency strengthens too quickly.

“We have increased our readiness to intervene in forex markets to dampen rapid Swiss Franc appreciation,” SNB Chairman Martin Schlegel said on Thursday. The central bank also decided to keep interest rates unchanged at 0%.

Background: US Dollar and Federal Reserve Policy

The US Dollar (USD) serves as the official currency of the United States. It also circulates alongside local currencies in several countries. Moreover, it remains the most traded currency globally, accounting for over 88% of total forex turnover. Daily trading averages around $6.6 trillion, based on 2022 data.

Historically, the Dollar replaced the British Pound as the world’s main reserve currency after World War II. It remained tied to gold until the Bretton Woods system ended in 1971.

The Federal Reserve plays a key role in shaping the Dollar’s value. Its dual mandate focuses on price stability and maximum employment. To achieve this, the Fed adjusts interest rates. When inflation rises above 2%, the Fed typically hikes rates, which supports the Dollar. In contrast, lower inflation or weak employment can lead to rate cuts, which may weigh on the currency.

Quantitative Easing, QT, and Their Impact on the Dollar

During periods of market stress, the Federal Reserve can use additional tools. For example, it may implement quantitative easing (QE). Under QE, the Fed increases the money supply and buys government bonds. This action supports liquidity but often weakens the Dollar.

QE played a major role during the 2008 financial crisis, when credit markets froze. At that time, banks hesitated to lend due to counterparty risks.

On the other hand, quantitative tightening (QT) works in the opposite direction. Under QT, the Fed stops bond purchases and allows assets to mature without reinvestment. As a result, liquidity declines, which typically supports the US Dollar.