Why is the Swiss Franc facing broad-based weakness as low interest rates weigh?

• Swiss Franc faces steep weekly losses as leading central banks point to more policy tightening.
• Pressure on the SNB to hike interest rates is limited by subdued Swiss inflation.
• Broad-based US Dollar gains put USD/CHF on course to rise over 2% this week.

Demand for the lower-yielding Swiss Franc (CHF) has weakened as expectations of additional interest rate hikes in the US and other economies gather pace, leaving it the weakest major currency this week. A broadly stronger US Dollar (USD) is adding to those pressures. With the weekend approaching, USD/CHF is trading around 0.8395, close to levels last recorded in May 2025, and has gained more than 2% over the week.

Why do low SNB interest rates weigh on the Swiss Franc?

At 0%, the Swiss National Bank's (SNB) policy rate remains among the lowest in major economies. Although Swiss inflation has edged higher, it is still within the SNB's 0%-2% range, leaving policymakers with less incentive to increase rates. By contrast, rate hikes have already been delivered this year by the Federal Reserve (Fed), European Central Bank (ECB), Bank of Canada (BoC) and Bank of England (BoE) to curb inflation. Prices continue to rise faster than their respective targets, so policymakers have not ruled out further tightening while gauging how far the Middle East energy shock is passing through to wages and other prices.

Are firmer Fed rate hike bets driving the US Dollar to a 19-month high?

Renewed buying of the US Dollar has followed this week's hawkish comments from Federal Reserve (Fed) officials, with traders increasing their bets on additional rate hikes. The US Dollar Index (DXY), a measure of the Greenback against six major currencies, is trading near 103.40, its strongest level since April 2025. On the inflation front, October CPI increased 0.4% MoM and annual PPI inflation accelerated to 6.5%, although the monthly rise in producer prices was smaller than expected.

As the central bank seeks to return inflation to its 2% target, a number of Fed officials have argued this week that rates need to rise further. The October CPI increase was 0.4% MoM, while annual PPI inflation reached 6.5% despite a below-forecast monthly gain in producer prices.

Speaking on Friday, San Francisco Fed President Mary Daly said a rate increase would “in all likelihood” be needed and noted the difficulty of judging whether the Fed's policy stance was sufficiently restrictive.

Inflation will guide the course of interest rates, according to Chicago Fed President Austan Goolsbee, who said the Fed “has work to do” to lower it. These views were in line with remarks earlier this week by Dallas Fed President Lorie Logan, who advocated at least two additional quarter-point increases.

Traders have fully priced in a December rate increase of at least 25 basis points (bps), according to the CME FedWatch Tool. Such a move would take the Fed's target range to 4.00%-4.25%.

A 50 bps increase also carries a small probability in market pricing. Before Tuesday's data release, Fed Governor Christopher Waller said a half-point rise could be justified if October core CPI increased by around 0.3% or more; the actual reading was 0.3%. An additional hike in the first quarter of 2027 is also priced in by traders.