Swiss Franc gains as easing risk aversion weighs on US Dollar

• Easing tensions in the Strait of Hormuz reduced safe-haven demand for the US Dollar, causing the pair to depreciate.
• The US, Iran, and Oman are expected to close an interim deal to reopen the Strait of Hormuz, targeting a Wednesday announcement.
• BBH’s Elias Haddad says low Swiss inflation and a steady SNB keep weighing on the Franc, G10’s weakest currency this quarter.

USD/CHF extends its losses for the second successive day, trading around 0.8080 during the Asian hours on Wednesday. The pair depreciates as the US Dollar (USD) loses ground as safe-haven demand recedes amid growing diplomatic momentum surrounding a potential agreement to reopen the Strait of Hormuz.

Axios reported that the United States (US), Iran, and Oman are closing in on an interim agreement to reopen the Strait of Hormuz, with the US aiming for a Wednesday announcement. The report also stated that the deal under discussion sets up a 60-day temporary arrangement between Oman and Iran in the Hormuz Strait, a critical chokepoint to almost 20% of global energy supply, which could be extended.

However, the US Dollar could find minor support from a recovery in the benchmark 10-year US Treasury yield after it dipped toward 4.61% on Tuesday. That initial decline in yields was driven by falling energy prices, which helped cool inflation fears and tempered expectations of a hawkish response from the Federal Reserve (Fed).

Schmid flags AI-driven inflation risks, backing tighter Fed stance despite resilient growth

Fed’s Schmid delivered a modestly more hawkish message than relative to the historical average, with a 7.3/10 FXS Speechtracker score versus a 7/10 baseline, stressing that the current policy stance is “not tight” and that tighter monetary policy is required to return inflation to the 2% target. The emphasis on AI-related investment as a fresh inflation driver, the warning that recent disinflation is too tentative to confirm an easing trend, and the view that inflation remains “too high” and “worrisome” all reinforce a bias toward further restraint even as growth and the labor market are described as resilient and roughly balanced. By highlighting the PCE gauge as the preferred inflation metric and cautioning that energy relief may be temporary, the speech leans clearly toward guarding against upside price risks rather than validating imminent rate cuts.

The FXS Fed Sentiment Index slipped by 0.96 points to 145.80, signaling a slight pullback in perceived hawkishness following the speech. However, with the FXS Fed Sentiment Index still far above the neutral 100 line, the Fed remains firmly in hawkish territory despite the marginal softening, consistent with the elevated FXS Speechtracker reading and Schmid’s focus on persistent inflation risks.

Analysts at Brown Brothers Harriman note that Swiss price pressures remain very subdued, with July inflation coming in “in line with consensus.” They highlight that “headline CPI printed at 0.4% y/y vs. 0.5% in June while core CPI remained at 0.3% y/y for a fourth straight month,” reinforcing the Swiss National Bank’s assessment of only modest inflation over the forecast horizon and helping to keep the policy rate anchored at 0.00%. In this context, Elias Haddad at BBH argues that the persistently low inflation backdrop and steady SNB stance continue to weigh on the Swiss Franc, which has been the weakest G10 currency so far this quarter.

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