The US dollar is more expensive than it has been in years

The US dollar has been rising for months. The US currency has risen more than ten percent against the Swiss franc since the start of the year and is now trading above 1.01 francs, its highest level since spring 2019. The dollar gained around 15% against the euro.

The dollar is strong because of the interest rate differential between investments in the dollar, euro and Swiss franc. As well as the different interest rate expectations between these currencies. The “dollar” benefits from the US Federal Reserve’s very aggressive interest rate policy in the fight against record high inflation. Emphasizing that this will continue until inflation is broken, he said.

Continuous interest rate hikes

For this reason, the US Federal Reserve became the first of the most important central banks to end its zero-interest policy and begin raising key interest rates in March. It has since repeated this several times with larger rate hikes. The latest in September with a score of 0.75. Another big step is expected in November.

The Swiss National Bank (SNB) didn’t follow up until June, and the European Central Bank (ECB) in July even a month later. Since then, both the SNB and the ECB have continued to tighten interest rates. They should continue to do so as inflation remains well above their target. Prices in the euro area have increased by around ten percent recently. In Switzerland, inflation is much lower at 3.5 percent.

The dollar as a safe haven

Since then, interest rates on the three currencies have risen sharply. Ten-year U.S. government bonds currently yield around 4.25%. In contrast, German Bunds offer significantly lower returns, around 2.5 percent. It jumped even less for ten-year Swiss government bonds. These currently give 1.25%. The dollar attracts capital from Europe, which always follows the highest returns.

In addition, the world’s leading currency, the dollar, is also used as a safe haven in uncertain times. One trader says this is also true for the franc, but this is “somehow related” to the current war in Ukraine and the energy crisis in Europe. This means that the approaching recession in Europe could be more severe than in the US.

The fact that the franc is not under further pressure is due to inflation in Switzerland being significantly lower than 8.2 percent in the US or almost ten percent in the EU. (SDA/shq)