Swiss Franc Weakens as Fed Hike Bets Boost Dollar

Key Moments

CHF Under Pressure as USD Outperforms

The Swiss Franc (CHF) continues to trade on the back foot against the US Dollar (USD), holding close to Monday’s decline around 0.8088 during the Asian session on Tuesday. The USD/CHF pair is encountering selling interest in the Franc as the US Dollar maintains a relative performance edge, supported by firm expectations that the Federal Reserve (Fed) will raise interest rates this year.

At the time of writing, the US Dollar Index (DXY) – which measures the Greenback against a basket of six major currencies – is ticking higher near 101.05. The index is described as trading at its highest level in more than a year, underscoring the current strength in the US currency.

Fed Rate Expectations Drive Dollar Strength

Market-based probabilities tracked by the CME FedWatch tool indicate that the likelihood of at least one Fed rate increase this year stands at almost 87%. These hawkish expectations have strengthened following the latest Federal Open Market Committee (FOMC) Economic Projections, released last week.

The projections show that nine of the 19 Fed policymakers foresee an additional rate hike this year. This marks a notable shift from the March Economic Projections report, in which none of the officials anticipated a rate increase in the same period.

Key US and Swiss Data in Focus

Investors are watching upcoming US economic releases for further guidance on the interest rate outlook. Market participants are awaiting the US Personal Consumption Expenditure Price Index (PCE) data for May, scheduled for release on Thursday, as a key input for assessing the Fed’s inflation and policy trajectory.

During Tuesday’s session, attention is also on the preliminary US S&P Global PMI data for June. Consensus expectations point to an improvement in the Services PMI to 51.0, compared with 50.7 in May.

On the Swiss side, sentiment toward the Franc may be influenced by the ZEW Survey – Expectations for June, which is due to be released on Wednesday.

Upcoming Data Snapshot

Federal Reserve: Mandate and Policy Tools

US monetary policy is determined by the Federal Reserve, which is tasked with two primary objectives: maintaining price stability and promoting full employment. The Fed’s main mechanism for pursuing these goals is the adjustment of interest rates.

When inflation runs above the Fed’s 2% target and price pressures accelerate, the central bank raises interest rates, increasing borrowing costs across the economy. Higher rates tend to support the US Dollar, as they can make US assets more appealing to global investors.

Conversely, if inflation drops below 2% or the Unemployment Rate is elevated, the Fed may cut interest rates to stimulate borrowing and economic activity, a move that typically weighs on the Greenback.

FOMC Meetings and Composition

The Federal Reserve holds eight monetary policy meetings each year, during which the FOMC reviews economic conditions and sets policy. The committee includes twelve officials: seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who rotate annually in one-year voting terms.

QE, QT, and Their Impact on the Dollar

In exceptional circumstances, the Fed may implement Quantitative Easing (QE), a non-standard policy tool designed to increase the flow of credit when the financial system is impaired or when inflation is particularly low. QE involves creating additional US Dollars and using them to purchase high-grade bonds from financial institutions. This process is generally associated with a weaker US Dollar.

The opposite policy, Quantitative Tightening (QT), occurs when the Fed stops buying bonds and allows securities on its balance sheet to mature without reinvestment. QT is typically considered supportive of the US Dollar, as it gradually removes liquidity that had been added through QE.