The dollar is struggling

The EUR/USD exchange rate has been very volatile since last Wednesday. As expected, the Fed raised its rates by 0.75% last week, thereby bringing the Fed Funds rate range to 3.75–4.00%, their highest level since January 2008. However, the central bank blew hot and cold on the markets, as in its statement it first said that the aggressive rate campaign was in its final phase. This brought downward pressure on the greenback. Then we experienced a spectacular reversal with Jerome Powell’s statements. Mr Powell predicted that the slowdown in hikes will be necessary at some point, but that the final level of rates would be higher than expected by the FOMC at its September meeting. The dollar then completely reversed its movement, pushing well above the exchange rate against the franc to 1.0147 and pulling the single currency back from 0.9975 to 0.9730. However, the movements were not over, as on Friday US employment figures shook the market. With 261,000 new jobs versus 315,000 in September and the unemployment rate up 0.2% to 3.7%, the markets tightened and pushed the EUR/USD exchange rate down again. In the immediate future, the results of yesterday’s elections have taken the attention. They could lead to a change in control of one or both chambers of Congress. This would have a significant impact on the US budget and would seriously complicate President Joe Biden’s programmes as well as his foreign policy. This would certainly have a negative impact on the greenback.

In Switzerland, since Thursday and the publication of the latest inflation figure, attention has once again focused on the Swiss National Bank. At 3.0%, after 3.3% in the previous month, the annual inflation rate not only fell for the second consecutive month, but was also below the SNB’s forecast of 3.4% for the third and fourth quarters of this year. At its last meeting, in its monetary policy assessment of 22 September 2022, the SNB stated that “it cannot be ruled out that further increases in the key rate will be necessary to ensure price stability in the medium term” and forecast average annual inflation of 1.7% for 2024 and 2% at the end of its forecast horizon in the second quarter of 2025. With inflation below fears, it could be realistic for the SNB to raise its key rate by 50 basis points in December, but then adopt a wait-and-see attitude due to uncertainty factors. This is in any case what the market seems to be anticipating with the future yield curve, which forecasts a rate of 0.83 in December and 1.06 in March. This means an increase of 0.50%, at best, on 15 December and then the status quo until March in any case.

The tone is quite different from that in Frankfurt. On Friday, Christine Lagarde assured at a conference in Talinn in Estonia that the European Central Bank will quickly take additional measures if high inflation persists. She was joined in her remarks by François Villeroy de Galhau, Governor of the Banque de France and member of the ECB’s Council, who told the press that the ECB must not stop raising interest rates until inflation peaks. Inflation reached a record high of 10.7% last month. It expects this peak to be reached in the first half of 2023. These statements allowed the single currency to regain some ground and settle around parity against the US dollar. Against the franc, however, the euro is moving laterally. In recent days, however, it saw some sharp declines from 0.9920 to 0.9870, then from 0.9920 to 0.9880. These up and downs close to parity give rise to some questions. Is the SNB, which changed its approach by tolerating an appreciation of the franc against the single currency, be behind these movements? The market is therefore dovish on the SNB’s monetary policy and hawkish on that of the ECB. If this is confirmed, the interest rate differential between the two should widen. It will then be interesting to see what our national bank will do.

On Thursday, the Bank of England increased its key rate by 0.75%, bringing it to 3%. This was largely anticipated, but comments from its governor Andrew Bailey disappointed the markets. He said, “We can’t make promises about future interest rates but based on where we stand today, we think Bank Rate will have to go up by less than currently priced in financial markets”. The effect was immediate on the British currency, which plunged against the dollar before regaining some ground as the US currency weakened after employment figures, as we saw previously.

Other beneficiaries of the current decline in the dollar are precious metals. The ounce of gold is strongly on the upside. Its price had risen by more than $50 at the yesterday’s and by $100 since last Wednesday. This morning, the price is still comfortably above the $1,700 mark. The ounce of silver is also on the rise. It rose from $18.83 on Wednesday to $21.60 yesterday morning.