USD/CHF falls to almost 0.8650 due to dovish Fed and rising geopolitical tensions
- The USD/CHF pair is extending losses as traders expect the Fed to begin cutting interest rates in September.
- San Francisco Fed President Mary Daly stressed that the U.S. central bank should gradually lower interest rates.
- Due to increasing geopolitical tensions in the Middle East and the ongoing Russia-Ukraine conflict, the Swiss franc could continue to appreciate in value.
USD/CHF continues to lose ground, trading around 0.8640 during the Asian session on Monday. The US dollar (USD) continues to weaken after dovish comments from US Federal Reserve (Fed) officials, increasing speculation of a central bank rate cut in September and undermining the USD/CHF pair.
According to the Financial Times, Mary Daly, President of the Federal Reserve Bank of San Francisco, stressed on Sunday that the US central bank should gradually reduce borrowing costs. In addition, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, warned that central bank officials should be cautious not to maintain a restrictive policy longer than necessary.
The US Dollar Index (DXY), which measures the value of the US dollar (USD) against six other major currencies, extends its losses for the second day in a row, hovering around 102.10. The decline in US yields is adding to the downward pressure on the greenback, with yields on 2- and 10-year bonds at 4.05% and 3.88%, respectively, at the time of writing.
As for the Swiss franc, safe-haven inflows may have supported the Swiss franc (CHF) amid rising geopolitical tensions. According to Reuters, citing local news agency Times of Israel, Hamas issued a statement rejecting the terms of a hostage release and ceasefire deal discussed in Doha on Thursday and Friday. In addition, concerns have intensified over escalating tensions between Ukraine and Russia, as Ukraine has launched Russia’s largest invasion since World War II.
On Friday, industrial production in Switzerland rose 7.3% in the second quarter compared with the same period last year, recovering sharply from a downwardly revised 2% decline in the previous quarter. This represents the largest increase in industrial production since the first quarter of 2022. Traders are likely awaiting trade balance data due to be released on Tuesday.
Frequently asked questions about the Swiss franc
The Swiss franc (CHF) is the official currency of Switzerland. It is among the ten most traded currencies in the world and reaches a volume that far exceeds the size of the Swiss economy. Its value is determined by, among other things, the general market sentiment, the economic health of the country or the actions of the Swiss National Bank (SNB). Between 2011 and 2015, the Swiss franc was pegged to the euro (EUR). The peg was abruptly removed, causing the franc to rise in value by more than 20% and causing turbulence in the markets. Although the peg is no longer in force, the development of the CHF tends to correlate strongly with that of the euro due to the high dependence of the Swiss economy on the neighboring euro zone.
The Swiss franc (CHF) is considered a safe haven, or a currency that investors buy in the markets during times of stress. This is due to Switzerland’s perceived status in the world: a stable economy, a strong export sector, large central bank reserves, or a long-standing political stance of neutrality in global conflicts make the country’s currency a good choice for investors who avoid risks. Turbulent times are likely to strengthen the value of the CHF against other currencies that are considered riskier investments.
The Swiss National Bank (SNB) meets four times a year – once a quarter, less than other major central banks – to decide on monetary policy. The bank aims to keep inflation below 2% per year. When inflation is above target or is expected to be above target in the foreseeable future, the bank tries to curb price growth by raising the key interest rate. Higher interest rates are generally positive for the Swiss franc (CHF) as they lead to higher returns and make the country more attractive to investors. On the contrary, lower interest rates tend to weaken the CHF.
The release of macroeconomic data in Switzerland is crucial for assessing the economic situation and can affect the valuation of the Swiss franc (CHF). The Swiss economy is broadly stable, but any sudden change in economic growth, inflation, the current account or the central bank’s foreign reserves can cause the CHF to fluctuate. In general, high economic growth, low unemployment and high confidence are good for the CHF. Conversely, if economic data points to slowing momentum, the CHF is likely to lose value.
As a small and open economy, Switzerland is highly dependent on the health of its neighbouring Eurozone economies. The enlarged European Union is Switzerland’s most important economic partner and a key political ally. Therefore, the macroeconomic and monetary stability of the Eurozone is crucial for Switzerland and, by extension, for the Swiss franc (CHF). Given this dependence, some models suggest that the correlation between the performance of the Euro (EUR) and the CHF is more than 90%, or almost perfect.
