Forex Trading, News, Systems and More

USD/CHF drops to near 0.8650 due to dovish Fed, rising geopolitical tensions

  • USD/CHF extends its losses as traders expect the Fed to start reducing the rate in September.
  • San Francisco Fed President Mary Daly emphasized that the US central bank should reduce rates gradually.
  • The Swiss Franc may appreciate further due to rising geopolitical tensions in the Middle East and the ongoing Russia-Ukraine conflict.

USD/CHF continues to lose ground, trading around 0.8640 during the Asian session on Monday. The US Dollar (USD) continues to weaken following dovish comments from Federal Reserve (Fed) officials, raising bets for an interest rate cut by the central bank in September and undermining the USD/CHF pair.

Federal Reserve Bank of San Francisco President Mary Daly emphasized Sunday that the US central bank should take a gradual approach to reducing borrowing costs, according to the Financial Times. Additionally, Federal Reserve Bank of Chicago President Austan Goolsbee warned that central bank officials should be cautious about keeping a restrictive policy in place longer than necessary.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against other six major currencies, extends its losses for the second successive day, hovering around 102.10. The decline in the US yields contributes to downward pressure for the Greenback with 2-year and 10-year yields standing at 4.05% and 3.88%, respectively, at the time of writing.

On the CHF front, the safe-haven flows amid rising geopolitical tensions might have supported the Swiss Franc (CHF). Hamas has issued a statement rejecting the terms for a hostage release-ceasefire deal discussed in Doha on Thursday and Friday, according to Reuters citing a local news agency Times of Israel. Additionally, concerns about escalating tensions between Ukraine and Russia were heightened as Ukraine initiated the largest invasion of Russia since World War II.

On Friday, Industrial Production in Switzerland surged by 7.3% year-on-year in the second quarter, rebounding sharply from a downwardly revised 2% decline in the previous quarter. This represents the fastest expansion in industrial production since Q1 2022. Traders are likely awaiting the Trade Balance data, scheduled for release on Tuesday.

Swiss Franc FAQs

The Swiss Franc (CHF) is Switzerland’s official currency. It is among the top ten most traded currencies globally, reaching volumes that well exceed the size of the Swiss economy. Its value is determined by the broad market sentiment, the country’s economic health or action taken by the Swiss National Bank (SNB), among other factors. Between 2011 and 2015, the Swiss Franc was pegged to the Euro (EUR). The peg was abruptly removed, resulting in a more than 20% increase in the Franc’s value, causing a turmoil in markets. Even though the peg isn’t in force anymore, CHF fortunes tend to be highly correlated with the Euro ones due to the high dependency of the Swiss economy on the neighboring Eurozone.

The Swiss Franc (CHF) is considered a safe-haven asset, or a currency that investors tend to buy in times of market stress. This is due to the perceived status of Switzerland in the world: a stable economy, a strong export sector, big central bank reserves or a longstanding political stance towards neutrality in global conflicts make the country’s currency a good choice for investors fleeing from risks. Turbulent times are likely to strengthen CHF value against other currencies that are seen as more risky to invest in.

The Swiss National Bank (SNB) meets four times a year – once every quarter, less than other major central banks – to decide on monetary policy. The bank aims for an annual inflation rate of less than 2%. When inflation is above target or forecasted to be above target in the foreseeable future, the bank will attempt to tame price growth by raising its policy rate. Higher interest rates are generally positive for the Swiss Franc (CHF) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken CHF.

Macroeconomic data releases in Switzerland are key to assessing the state of the economy and can impact the Swiss Franc’s (CHF) valuation. The Swiss economy is broadly stable, but any sudden change in economic growth, inflation, current account or the central bank’s currency reserves have the potential to trigger moves in CHF. Generally, high economic growth, low unemployment and high confidence are good for CHF. Conversely, if economic data points to weakening momentum, CHF is likely to depreciate.

As a small and open economy, Switzerland is heavily dependent on the health of the neighboring Eurozone economies. The broader European Union is Switzerland’s main economic partner and a key political ally, so macroeconomic and monetary policy stability in the Eurozone is essential for Switzerland and, thus, for the Swiss Franc (CHF). With such dependency, some models suggest that the correlation between the fortunes of the Euro (EUR) and the CHF is more than 90%, or close to perfect.