Swiss Franc faces pressure as Fed rate pause expectations weigh on US Dollar

• A decline in September US housing starts and record-low pending home sales weighed on the US Dollar.
• Oil rose following drone attacks in the Middle East and Ukraine, adding to inflation pressures and bets on a December Fed rate increase.
• Switzerland’s low interest rates encourage carry trades, prompting investors to sell the Franc and buy higher-yielding overseas assets.

September’s fall in US housing starts and a record low in pending home sales have added to signs of economic weakness, putting pressure on the US Dollar (USD). Against this backdrop, USD/CHF is declining for a third successive day, trading near 0.8230 in Thursday’s Asian session.

An 84% probability of unchanged Fed interest rates next week is priced in by traders, while the likelihood of a December rate increase stands at 90%, according to the CME FedWatch Tool. The outlook nevertheless remains uncertain: last week, Fed Chair Kevin Warsh declined to indicate when further increases might come or whether they would be needed.

Rising oil prices could, however, lend support to the US Dollar by stoking inflation concerns and strengthening expectations of a Federal Reserve (Fed) rate increase. Crude gained after a drone strike on Saudi Aramco’s Shaybah oil field caused two casualties, heightening tensions in the Middle East and fears of disruption to energy supplies. Meanwhile, Ukraine launched extensive drone attacks on key Russian oil facilities this week. The strikes signalled Kyiv’s intention to obstruct Moscow’s planned increase in diesel exports under a recent agreement between Presidents Trump and Putin.

Persistent pressure on the Swiss Franc (CHF) could nevertheless restrict further losses in USD/CHF. A growing interest rate gap between the United States and Switzerland, coupled with increasing carry-trade-related selling, is the main source of the Franc’s weakness.

With markets expecting US borrowing costs to remain high and Swiss rates to stay among the world’s lowest, the Franc (CHF) has become an increasingly appealing funding currency. Investors consequently borrow in Francs and sell the currency to purchase higher-yielding assets, maintaining downward pressure on its value.