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Dollar shaken by Fed political risk: EUR strengthens while CHF gains on safe haven positioning

  • itay5873
  • 3 days ago
  • 2 min read

The US dollar is facing an unusual kind of pressure this week, as traders shift focus away from pure macro data and toward political risk around the Federal Reserve. Markets are used to speculation about interest rates and inflation. What they are not used to is the idea that the Fed itself could become a political target. That change in perception is now affecting currency positioning across the board.


The core driver is confidence. The dollar’s strength is not only based on interest rate differentials, it is also tied to global trust in US stability, institutions, and predictable policy. When headlines introduce uncertainty around the Fed’s independence, it creates hesitation for investors who typically treat the dollar as a safe and reliable anchor. Instead of moving into the dollar as a risk hedge, traders start looking for alternative havens.


This is why the euro is holding firmer than expected. EUR demand this week is not necessarily driven by bullish Europe growth expectations. It is driven by the market reducing exposure to US political risk. Even small shifts in institutional trust can create meaningful FX flows because global portfolios are enormous, and allocation decisions do not need to change dramatically to impact price action.


At the same time, the Swiss franc is re emerging as a key safety play. When political uncertainty rises, CHF often benefits because Switzerland is seen as stable, neutral, and low risk. In periods of institutional stress, the franc can attract flows even if yield differentials are not attractive. The move is about preservation, not return.


Another reason the FX market is reacting strongly is timing. This week is already packed with major catalysts, including inflation data. Traders were prepared for volatility driven by CPI. Now they are facing an additional shock variable. That creates an environment where moves can become exaggerated, as positioning becomes defensive and liquidity is reduced.


For the Fed narrative specifically, the market is not only worried about the immediate headlines. The deeper fear is that policy could become harder to forecast. If investors cannot trust that decisions will remain independent and data driven, then future rate expectations become less stable. Currency markets do not handle uncertainty well. When predictability weakens, volatility tends to rise, and safe haven demand increases.


This setup could keep the dollar unstable even if US data remains strong. Under normal conditions, better US inflation or growth data supports USD because it pushes rate expectations higher. But political risk can mute that effect. Instead of reacting only to data, traders are now reacting to credibility.


In short, this is not a standard forex week. The dollar is being pressured not purely because of rates, but because of confidence. The euro is gaining partly on relative stability, and the Swiss franc is catching flows as investors seek protection. Until the institutional risk narrative fades, this flow pattern can continue to dominate FX sentiment through the rest of the week.

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