Swiss Franc struggles as US Dollar declines on Fed rate pause expectations

- September US housing starts fell and pending home sales hit record lows, dragging down the US Dollar.
- Middle East and Ukraine drone attacks pushed oil higher, fueling inflation and December Fed rate hike bets.
- Low Swiss interest rates drive carry trades, encouraging investors to sell the Franc for higher-yielding foreign assets.
USD/CHF loses ground for the third consecutive day, trading around 0.8230 during Asian hours on Thursday. The pair depreciates as the US Dollar (USD) faces challenges, as recent economic data pointed to signs of weakness in the US economy, with September housing starts declining and pending home sales falling to a record low.
According to the CME FedWatch Tool, traders are pricing in an 84% probability that the Fed will hold interest rates steady next week, alongside a 90% chance of a rate hike in December. However, uncertainty persists after Fed Chair Kevin Warsh refrained last week from offering guidance on the timing or necessity of future interest rate hikes.
However, the Greenback may receive support as surging oil prices fuel inflation fears and boost expectations of a Federal Reserve (Fed) rate hike. Oil prices advanced following a drone attack on Saudi Aramco’s Shaybah oil field that resulted in two casualties, intensifying geopolitical friction in the Middle East and raising concerns over potential energy supply disruptions. In tandem, Ukraine executed large-scale drone strikes against critical Russian oil infrastructure this week, signaling Kyiv’s intent to impede Moscow’s planned expansion of diesel exports under a recent agreement between Presidents Trump and Putin.
The downside for the USD/CHF pair could be limited as the Swiss Franc (CHF) encounters persistent headwinds. This weakness is primarily driven by a widening interest rate differential between the United States and Switzerland, alongside mounting selling pressure stemming from carry trades.
Because market expectations suggest US borrowing costs will stay elevated while Swiss interest rates remain among the lowest globally, the Franc (CHF) has increasingly become an attractive funding currency. As a result, investors are taking out Franc-denominated loans and selling the currency to pivot toward higher-yielding assets, putting consistent downward pressure on the Franc.
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