USD/CHF dips to 14-year lows below 0.8035 amid broad-based Dollar weakness
- The US Dollar extends losses on a revived "Sell America" trade.
- Trump's attacks on Fed's Powell are undermining confidence in the central bank and eroding the US Dollar's reserve currency status.
- Investors' concerns about the negative impact economic impact of tariffs are adding pressure on the US Dollar.
The Swiss Franc rallies further on Thursday reaching levels not seen since October 2021. The USD/CHF breached the 0.8035 level and is approaching the 0.8000 area amid growing concerns about the Federal Reserve’s independence.
US President Trump rattled markets on Wednesday, calling Fed Chair “terrible” and an “average mentally person” and suggesting that he might name his replacement well ahead of the end of his term, due in May next year. This would be a highly irregular move, probably creating a shadow chair that would undermine the credibility of the world’s major central bank.
Fed Powell maintains its cautious stance against pressures and critics
These critics came after Powell stood firm on the President’s pressures to lower interest rates and maintained the bank’s “wait-and-see” stance on his semiannual testimony to Congress.
Jerome Powell defended that the bank is well-positioned to react to the highly likely inflationary pressures stemming from Trump’s tariffs and refused to signal any rate cut in the near-term in the face of accusations from republican senators of being politically biased.
The speculation about the next Fed chair culminates a large series of attacks from the US President to the Fed chief that are undermining the credibility of the Federal Reserve and fuelling the “sell America” trade, which is eroding the US Dollar’s status as the world's reserve currency.
Beyond that, the threat of tariffs remains looming, as the clock ticks towards the June 9 deadline with no progress on trade deals. Investors' fears of the negative impact of unilateral tariffs in an already softening US economy pose additional pressure on the US Dollar.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.