US Dollar comes under pressure as safe-haven demand eases, while Swiss Franc stays stronger

• As Middle East tensions ease, weaker safe-haven demand and lower expectations of a Fed rate rise weigh on USD/CHF.
• With Swiss interest rates low, the CHF remains a preferred funding currency, attracting selling as traders seek higher yields.
• Stable inflation is expected to keep the Swiss National Bank’s rate at 0%, with any potential increase delayed until 2027.

At around 0.8220 in Friday’s Asian session, USD/CHF is heading lower for a third successive day. Optimism over US-led diplomacy has reduced demand for safe havens, weakening the US Dollar (USD) and putting the pair under pressure.

Traders now assign approximately a 75% probability to a 25-basis-point rate increase at the Federal Reserve’s forthcoming December meeting, according to the CME FedWatch Tool, down noticeably from 84.2% a day earlier. The retreat in expectations follows an easing of Middle East tensions, which has allayed concerns about oil supply disruption and wider inflationary pressures.

Crude oil prices, meanwhile, stabilised after reports of a move to resume peace negotiations. US Vice President JD Vance reportedly contacted Mohsen Rezaei, Secretary of Iran's Supreme National Security Council, in an initiative authorised by US President Donald Trump, who highlighted Iran’s need for essential supplies and medical assistance.

Continued weakness in the Swiss Franc (CHF), however, may constrain further declines in USD/CHF. A widening interest rate gap with the United States is encouraging carry trades that keep the CHF under selling pressure. With borrowing costs in Switzerland still the lowest in the world, traders regularly borrow in Francs and sell the currency to buy higher-yielding assets. Its appeal as a source of funding consequently weighs on its value.

The Swiss National Bank (SNB) has maintained its benchmark policy rate at 0% for more than a year, and this extended neutral stance underlies the carry-trade dynamic. Pointing to stable domestic inflation, SNB Chair Martin Schlegel reiterated that an immediate policy change was unnecessary. Economic forecasters anticipate unchanged rates through 2027, although financial markets have begun to factor in a possible increase in early 2027. Swiss policymakers have also toned down threats of direct intervention in currency markets, taking away another potential source of support for the Franc.

Dollar faces increasing downside risks, Scotiabank warns

A material shift in the balance of risks has left the Dollar exposed, according to Scotiabank strategists, who emphasise that “we see significant downside risk for the USD on the basis of weakening fundamentals.” In their view, recent levels of Dollar strength are no longer supported by the underlying macroeconomic environment. Further disappointing data would therefore leave the currency increasingly vulnerable.