Swiss Franc slides nearly 1% as US Dollar hits fresh yearly high

• USD/CHF climbs nearly 1% to a four-week high as the US Dollar extends its rally.
• Hotter-than-expected US inflation and hawkish Fed remarks fuel expectations of more aggressive rate hikes.
• The Fed-SNB policy divergence weighs on the Swiss Franc.

USD/CHF climbs nearly 1% on Wednesday, reaching a four-week high as the US Dollar (USD) strengthens across the board following a sharp shift in Federal Reserve (Fed) interest rate expectations. At the time of writing, the pair trades around 0.8335, extending gains for the second straight day.

The Greenback continues to attract buyers after hotter-than-expected US consumer inflation data and hawkish remarks from Fed officials raised the prospect of more aggressive interest rate hikes. The US Dollar Index (DXY), which measures the Greenback against a basket of six major currencies, trades around 102.96, surpassing the previous yearly peak of 102.94 set in October.

Data released on Tuesday showed that the US Consumer Price Index (CPI) rose 0.4% MoM in October, above the 0.3% forecast but down from 0.6% in September. Core CPI, which excludes food and energy, rose 0.3% MoM, matching September’s pace and beating the 0.2% forecast.

The inflation figures have added to expectations that the Fed may need to raise borrowing costs further to contain persistent price pressures. Before the release, Fed Governor Christopher Waller raised the possibility of a 50-basis-point (bps) rate hike in December if core CPI came in at 0.3% or higher. Dallas Fed President Lorie Logan and Philadelphia Fed President Anna Paulson have also backed additional tightening.

According to the CME FedWatch Tool, markets now fully price in a December rate hike, with an 87.1% probability of a 25 bps increase and a 12.9% chance of a larger 50 bps move. Traders also expect further rate increases in 2027.

Fed-SNB policy outlook keeps Swiss Franc under pressure

On the Swiss side, the Swiss National Bank (SNB) has kept its policy rate at 0% as inflation remains within its price-stability range. This contrasts with growing expectations of further Fed tightening, leaving the interest rate gap between the United States and Switzerland firmly in favor of the US Dollar.

However, Swiss inflation has also started to pick up. Annual consumer inflation accelerated to 1.5% in October, its highest level in nearly three years, largely driven by higher energy prices.

SNB Chairman Martin Schlegel said earlier this month the central bank would not hesitate to adjust monetary policy if price stability comes under threat. He noted that inflation in Switzerland is currently driven mainly by fuel and energy prices, adding that policymakers will closely monitor the risk of second-round inflation effects. Schlegel also reiterated that the policy rate remains the SNB's main tool, although foreign exchange interventions could be used if necessary.