Swiss Franc under pressure as higher US rates widen policy divide

The US dollar-Swiss franc (USD/CHF) pair has strengthened after the Federal Reserve raised interest rates for the first time since 2023, widening an already significant policy gap between the United States and Switzerland. The Fed increased its target range by 0.25 percentage points to 3.75%-4.00% on Wednesday, while the Swiss National Bank continues to hold its policy rate at 0%. The difference is adding pressure to the franc and keeping the dollar supported.

The Fed's message also suggests Wednesday's increase may not be the last. Its latest projections put the median federal funds rate at 4.1% at the end of 2026, consistent with another quarter-point increase before year-end. Inflation remains the main concern, with the Fed now expecting headline inflation of 3.7% this year and core inflation of 3.4%, both still well above its 2% target.

Widening rate gap keeps the franc under pressure

Switzerland presents a very different picture. The SNB has kept its policy rate at 0% since mid-2025 and maintained that level at its latest meeting in June. Swiss inflation remains comparatively low, with the central bank forecasting average inflation of just 0.6% in 2026. That gives the SNB considerably less reason to follow other major central banks in raising borrowing costs.

The widening gap matters for currencies because investors generally receive a higher return for holding US dollars than Swiss francs. It can also strengthen the incentive behind carry trades, where investors borrow in a low-yielding currency and move that money into currencies offering higher returns. With US rates moving higher while Swiss rates remain at zero, that difference has become increasingly important for USD/CHF.

The SNB also faces an unusual challenge with the franc. While geopolitical uncertainty would normally increase demand for the currency as a traditional safe haven, the central bank has repeatedly warned against excessive franc strength and remains willing to intervene in foreign exchange markets if necessary. This means safe-haven demand and monetary policy are currently pulling the currency in different directions.

Geopolitical risks could complicate the picture

The Middle East remains another source of uncertainty. Higher energy prices have contributed to inflation pressures globally, including in Switzerland, while also supporting the Fed's argument for tighter policy. At the same time, a further escalation could increase demand for traditional safe-haven currencies such as the franc, potentially working against the widening interest-rate gap. The SNB has acknowledged that developments in the region remain an important risk to both inflation and growth.