Dollar Rises as Softer Franc and Fed Signals Boost USD

Key Moments

Swiss Franc Under Pressure Ahead of Trade Data

USD/CHF is advancing after a notably weak performance in the previous session, with the pair changing hands near 0.8000 during Asian trading on Thursday. The move reflects continued pressure on the Swiss Franc (CHF) as market participants await the latest Swiss Trade Balance release.

The Franc’s softness is occurring while yields on Switzerland’s 10-year government bonds remain close to one-week highs. At the same time, geopolitical tensions in the Middle East are keeping market uncertainty elevated, lifting crude oil prices and reviving concerns about Swiss inflation.

Resilient Swiss Data Counteracts Inflation Concerns

In contrast to the inflation worries, recent domestic data showed unexpected strength. Second-quarter industrial production jumped 5.5% on a yearly basis, defying expectations for a 4.7% decline and rebounding from a revised 7.6% drop in the preceding quarter.

Analysts at Rabobank highlight that “for years, the Swiss central bank has struggled with the impact of haven flows into the CHF,” forcing the SNB to lean heavily on intervention threats and ultra-low policy rates to curb persistent appreciation pressures. With the Franc now softer and expectations for SNB rate hikes still limited compared with the ECB, they suggest the central bank is likely more comfortable with the current backdrop, as reduced safe haven inflows have eased one of its long-standing policy headaches.

Fed Minutes and Geopolitics Bolster the US Dollar

The latest leg higher in USD/CHF is being driven largely by a stronger US Dollar (USD), supported by a hawkish tone in the most recent Federal Reserve (Fed) Meeting Minutes. Records from the July FOMC gathering indicated that policymakers favor raising interest rates in the near term if inflation does not show further improvement, in line with market expectations for at least one additional rate hike this year.

The Greenback is also benefiting from safe-haven flows amid frictions in the Strait of Hormuz, where tensions between the US and Iran have intensified. While former President Donald Trump noted that oil transit continues and expressed openness to negotiations with Tehran, persistent risk aversion is still supporting demand for the US currency.

Treasury Buybacks Pose a Headwind for Dollar Upside

Upside for the US Dollar may be constrained as the US Treasury Department moves to stabilize domestic bond markets. In an effort to tame rising yields and address liquidity concerns, the Treasury has announced plans to at least double its buyback operations for long-dated securities with maturities between 10 and 30 years.

This expanded program is designed to limit long-term borrowing costs and improve overall US Dollar liquidity globally. While these actions aim to calm bond markets, they could also introduce downside pressure on the Greenback over time.