Swiss Franc Loses Nearly 1% as US Dollar Reaches New Yearly High

• A sustained US Dollar rally lifts USD/CHF nearly 1% to a four-week high.
• Expectations of steeper rate hikes gather pace after above-forecast US inflation and hawkish comments from Fed officials.
• Diverging Fed and SNB policies keep the Swiss Franc under pressure.

Broad-based US Dollar (USD) strength pushes USD/CHF nearly 1% higher to a four-week peak on Wednesday, as expectations for Federal Reserve (Fed) interest rates shift sharply. Trading near 0.8335 at the time of writing, the pair is advancing for a second consecutive day.

Buying interest in the Greenback remains firm as stronger-than-forecast US consumer inflation and hawkish comments from Fed officials bolster the prospect of more aggressive rate increases. Trading near 102.96, the US Dollar Index (DXY) has moved above the previous yearly high of 102.94 recorded in October. The index tracks the Greenback against a basket of six major currencies.

Tuesday’s release put the October increase in the US Consumer Price Index (CPI) at 0.4% MoM, exceeding the 0.3% forecast but easing from September’s 0.6%. Excluding food and energy, core CPI advanced 0.3% MoM, unchanged from September’s pace and 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 data, Fed Governor Christopher Waller had suggested that a core CPI reading of 0.3% or higher could warrant a 50-basis-point (bps) rate increase in December. 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 hike and a 12.9% chance to a larger 50 bps increase, while traders anticipate additional rate hikes in 2027.

Why is the Fed-SNB policy divergence weighing on the Swiss Franc?

With Swiss inflation still within its price-stability range, the Swiss National Bank (SNB) has maintained its policy rate at 0%. Against rising expectations of additional Fed tightening, that stance keeps the United States-Switzerland interest rate differential firmly supportive of the US Dollar.

Price pressures in Switzerland have nevertheless begun to rise. Driven largely by higher energy costs, 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 act without hesitation to adjust monetary policy should price stability be threatened. Fuel and energy prices are currently the main drivers of Swiss inflation, he noted, while stressing that policymakers would keep a close watch on the risk of second-round inflation effects. Although foreign exchange intervention remains an option if required, Schlegel reaffirmed that the policy rate is the SNB's primary instrument.