USD/CHF declines due to Trump's tariff threat on the EU and rising risk aversion
- US Dollar weakness increases demand for the safe-haven Swiss Franc.
- USD/CHF extends losses after Trump threatens a 50% tariff on imports from the EU, which would be effective June 1st.
- The Swissie pair remains vulnerable as confidence in the Greenback as the reserve currency wanes.
The Swiss Franc (CHF) continues to strengthen against the US Dollar (USD) on Friday, with concerns over the health of the United States (US) economy weighing on the Greenback.
At the time of writing, USD/CHF is trading at 0.8224, down 0.81% in the day, and heading toward the May low of 0.8186, which is a key support level.
United States (US) President Donald Trump threatened a 50% tariff on imports from the European Union (EU) on Friday, which would be effective June 1st. In a social media post, Trump stated that the EU was "very difficult to deal with" and "our negotiations with them are going nowhere."
Renewed tariff threats have reignited outflows from the US into safe havens like Gold and the Swiss Franc.
In the US, the House of Representatives' decision to pass the controversial ‘one big beautiful bill’ on Thursday has raised significant concerns over fiscal policy and debt repayments, underscoring the gravity of the situation.
On social media, Trump stated, “This is arguably the most significant piece of Legislation that will ever be signed in the History of our Country!"
However, the package is expected to add $3.8 trillion to the federal government's growing debt of $36.2 trillion over the next decade. This will increase the debt burden and is viewed negatively for the economy.
With speakers of the Federal Reserve (Fed) continuing to provide commentary about expectations of the US economy, their remarks play a pivotal role in shaping interest rate expectations.
Although higher interest rates are generally supportive of a currency, a more uncertain economic backdrop continues to support demand for alternative assets.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.