• USD/CHF slides as easing Middle East tensions reduce safe-haven demand and Fed rate hike expectations.
• Low Swiss interest rates make the CHF a key funding currency, boosting selling pressure for higher yields.
• Swiss National Bank is expected to hold rates at 0% with stable inflation, delaying potential rate hikes until 2027.

USD/CHF extends its losses for the third consecutive day, trading around 0.8220 during Asian hours on Friday. The pair is experiencing downward pressure as the US Dollar (USD) weakens on reduced safe-haven demand, driven by optimism around US-led diplomatic efforts.

Easing tensions in the Middle East have helped temper fears over oil supply disruptions and broader inflation, which in turn has dampened expectations for a Federal Reserve rate hike at its upcoming December meeting. According to the CME FedWatch Tool, traders are now pricing in approximately a 75% chance of a 25-basis-point rate increase, marking a noticeable decline from 84.2% just a day earlier.

Meanwhile, crude oil prices stabilized following reports that US Vice President JD Vance contacted Mohsen Rezaei, Secretary of Iran’s Supreme National Security Council, to reopen peace talks, a diplomatic effort approved by US President Donald Trump, who noted Iran’s need for essential supplies and medical assistance.

The downside for the USD/CHF pair may be limited due to persistent weaknesses in the Swiss Franc (CHF). The CHF continues to face selling pressure from carry trades, fueled by a widening interest rate differential with the United States. Because Swiss borrowing costs remain the lowest globally, the Franc serves as an attractive funding source; traders routinely borrow in Francs and sell them to purchase higher-yielding assets, suppressing the currency’s value.

Underpinning this dynamic is the Swiss National Bank’s (SNB) prolonged neutral stance, having kept its policy benchmark rate at 0% for over a year. SNB Chair Martin Schlegel reaffirmed that no immediate policy adjustment is necessary given stable domestic inflation. While economic forecasters expect rates to hold steady through 2027, financial markets are beginning to price in a potential rate hike in early 2027. Additionally, Swiss policymakers have scaled back their threats of direct currency intervention, removing another potential support layer for the Franc.

Scotiabank flags growing downside risks for the Dollar

Strategists at Scotiabank caution that the balance of risks around the greenback has shifted materially, stressing that “we see significant downside risk for the USD on the basis of weakening fundamentals.” They note that the underlying macro backdrop no longer justifies recent levels of Dollar strength, leaving the currency increasingly vulnerable should incoming data continue to underwhelm.