Swiss Franc struggles as Fed-SNB policy divergence favours Greenback

USD/CHF trades with a mild positive bias on Monday as the US Dollar (USD) steadies following last week’s pullback, which was driven by a sharp decline in US Treasury yields. At the time of writing, the pair trades around 0.8263, up 0.27% on the day.

The benchmark 10-year US Treasury yield rises around 7 basis points (bps) to 5.13%, recovering after touching 5.03% on Thursday, its lowest level since September 23. Yields fell sharply last week as an AI-led equity sell-off prompted traders to rotate away from riskier assets and into government bonds.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.95 after falling to 101.58 on Friday. Weakness in the Euro (EUR) due to political unrest and mounting fiscal concerns in France provides additional support to the US Dollar.

Expectations of further interest rate hikes by the Federal Reserve (Fed) also cushion the Greenback’s downside. US inflation data released last week surprised to the upside, with headline Consumer Price Index (CPI) rising 0.6% MoM and 3.7% YoY in September. Core inflation rose to 2.6%, exceeding expectations of 2.5%. Producer prices also came in stronger than expected, reinforcing concerns that inflation could remain above the Fed’s 2% target for longer.

However, traders widely expect the Fed to keep interest rates unchanged this month after raising the federal funds rate by 25 basis points in September. Fed Chair Kevin Warsh avoided offering forward guidance on Friday, saying, “I don’t prejudge meetings.” The CME FedWatch Tool shows traders pricing in a 15% probability of a rate hike at the October 27-28 meeting and an 89% chance of an increase by December.

Prospects of further Fed tightening keep the Swiss Franc (CHF) on the back foot, particularly as the Swiss National Bank (SNB) maintains its policy rate at 0%. The bar for an SNB rate hike appears relatively high, as inflation remains within its 0%-2% price stability range. However, safe-haven demand linked to geopolitical tensions and political unrest in France could support the Swiss Franc against other major currencies.