Market Data 
- USD/CHF reverses a majority of Friday’s losses as the US Dollar bounces back strongly.
- The US Dollar recovers as traders expect the Fed to hold interest rates steady in January.
- The SNB is expected to reduce interest rates further in 2025.
The USD/CHF pair recovers a majority of Friday’s losses and surges to near 0.8985 in Monday’s North American session. The Swiss Franc pair strengthens as the US Dollar (USD) bounces back strongly amid firm expectations that the Federal Reserve (Fed) will approach interest rate cuts cautiously in 2025.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounds sharply to near 108.20.
Fed policymakers have taken a cautious approach to interest rate cuts. They believe that progress in disinflation has stalled and labor market conditions are not as bad as they anticipated in September. Additionally, uncertainty over President-elect Donald Trump’s incoming policies has compelled officials to slow down the policy-easing cycle.
The Latest Fed dot plot showed that officials collectively see Federal Fund rates heading to 3.9% in 2025. According to the CME FedWatch tool, traders are confident that the Fed will leave interest rates unchanged in the range of 4.25%- 4.50% for the first policy meeting of 2025 in January.
On the economic data front, the United States (US) Durable Goods Orders data for November have come in weaker than expected. Durable Goods Orders declined by 1.1%, faster than estimates of 0.4%. In October, the economic data rose by 0.3%.
Meanwhile, the Swiss Franc (CHF) weakens across the board. The Swiss National Bank (SNB) is expected to ease monetary policy further amid fears of inflation undershooting the central bank’s target of 2%. The SNB has already reduced interest rates by 125 basis points (bps) this year to 0.5%.
US Dollar FAQs
The US 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 found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
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 stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the 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 in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker 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 from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
