US Dollar reaches new yearly high as Swiss Franc drops nearly 1%

• A further advance in the US Dollar lifts USD/CHF nearly 1% to its highest level in four weeks.
• US inflation above forecasts, alongside hawkish Fed comments, strengthens expectations for more aggressive interest rate rises.
• Diverging Fed and SNB policy paths put pressure on the Swiss Franc.

Stronger-than-expected US inflation has prompted a sharp reassessment of Federal Reserve (Fed) interest rate expectations, driving broad-based US Dollar (USD) strength and a rise of nearly 1% in USD/CHF on Wednesday to a four-week high. Trading at around 0.8335 at the time of writing, the pair is heading for a second consecutive day of gains.

Demand for the Greenback remains firm as above-forecast US consumer inflation and hawkish comments from Fed officials bolster the prospect of more aggressive interest rate rises. At around 102.96, the US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, has exceeded its earlier yearly high of 102.94 recorded in October.

October's US Consumer Price Index (CPI) increased by 0.4% MoM, Tuesday's release showed. That exceeded the 0.3% forecast, although it marked a slowdown from September's 0.6%. Excluding food and energy, core CPI advanced 0.3% MoM, unchanged from September's pace but above expectations of 0.2%.

Expectations that the Fed may have to lift borrowing costs further to curb persistent price pressures have strengthened following the inflation release. Ahead of the figures, Fed Governor Christopher Waller had suggested that a December rate rise of 50 basis points (bps) was possible if core CPI reached 0.3% or more. Further tightening has also received support from Dallas Fed President Lorie Logan and Philadelphia Fed President Anna Paulson.

A December rate increase is now fully priced in, according to the CME FedWatch Tool. Markets assign an 87.1% probability to a 25 bps rise and a 12.9% chance to a larger 50 bps increase, while traders anticipate additional rate rises in 2027.

Swiss Franc remains under pressure as Fed and SNB policy paths diverge

With inflation still inside its price-stability range, the Swiss National Bank (SNB) has maintained its policy rate at 0%. Set against mounting expectations of additional Fed tightening, this leaves the interest rate differential between the United States and Switzerland firmly in the US Dollar's favour.

Inflation in Switzerland has nevertheless begun to rise as well. Driven largely by more expensive energy, annual consumer inflation reached 1.5% in October, the highest reading in nearly three years.

Earlier this month, SNB Chairman Martin Schlegel said the central bank would adjust monetary policy without hesitation should price stability be threatened. Fuel and energy prices currently account for most of Switzerland's inflation, he noted, and policymakers will keep a close watch on the risk of second-round inflation effects. While reaffirming that the policy rate remains the SNB's principal instrument, Schlegel also said foreign exchange intervention could be deployed if needed.