Nearly 1% fall for Swiss Franc as US Dollar sets new yearly high

• Nearly 1% higher, USD/CHF hits a four-week peak as the US Dollar rally continues.
• Expectations of steeper rate hikes build after above-forecast US inflation and hawkish comments from Fed officials.
• Diverging Fed and SNB policies put pressure on the Swiss Franc.

USD/CHF is up nearly 1% on Wednesday. The pair has reached a four-week high as a sharp repricing of Federal Reserve (Fed) interest rate expectations lifts the US Dollar (USD) across major currencies. Trading around 0.8335 at the time of writing, USD/CHF is advancing for a second consecutive day.

Around 102.96, the US Dollar Index (DXY) has moved above its previous yearly high of 102.94, recorded in October. The index tracks the Greenback against a basket of six major currencies. Demand for the US currency remains strong after US consumer inflation exceeded forecasts and hawkish Fed commentary increased the prospect of more aggressive rate rises.

October's US Consumer Price Index (CPI) increased 0.4% MoM, Tuesday's data showed. That exceeded the 0.3% forecast, although it slowed from September's 0.6%. Excluding food and energy, core CPI advanced 0.3% MoM, unchanged from September's pace and above the 0.2% forecast.

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 indicated 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 rise and a 12.9% probability to a larger 50 bps increase. Additional rate rises in 2027 are also anticipated by traders.

Fed-SNB policy gap pressures Swiss Franc

With inflation still inside its price-stability range, the Swiss National Bank (SNB) has maintained its policy rate at 0%. Expectations of additional Fed tightening stand in contrast to that stance. The resulting United States-Switzerland interest rate differential remains firmly favourable to the US Dollar.

Swiss inflation, however, has begun to accelerate too. Driven largely by rising energy prices, 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. Policymakers will therefore watch closely for the risk of second-round inflation effects. While reaffirming the policy rate as the SNB's primary instrument, Schlegel also said foreign exchange intervention could be deployed if needed.