USD faces pressure: the Swiss franc is supported by safe-haven demand

During the Asian trading session, the USD/CHF exchange rate experienced a pullback after two days of gains, with the current trading price hovering around 0.7880. Ongoing geopolitical tensions worldwide, along with expectations that the Federal Reserve may continue to cut interest rates in 2026, are driving the Swiss Franc (CHF) to strengthen relative to the US dollar, which is facing pressures from multiple fronts.

Geopolitical Uncertainty Boosts Safe-Haven Demand

The Russia-Ukraine conflict and escalating Middle East tensions are prompting investors to seek safe assets. Russian Foreign Minister stated that Moscow will change its negotiation stance due to an attack on Putin’s residence. Meanwhile, Saudi Arabia’s airstrikes in Yemen, coupled with Iran declaring a state of “full-scale war” with the US, Europe, and Israel, have sparked market concerns over a broader conflict. Trump warned that if Iran resumes its nuclear program, the US will take further action. These factors collectively heighten demand for safe-haven assets.

Federal Reserve Rate Cut Expectations Weaken USD Appeal

The US dollar’s performance is also being weighed down by prospects for Federal Reserve policy. According to the latest CME FedWatch tool data, the probability of the Fed holding rates steady in January has risen to 83.9%, up from 80.1% a week ago. Conversely, the chance of a 25 basis point rate cut has decreased from 19.9% to 16.1%. These shifts suggest markets are pricing in the possibility of two rate cuts by the Fed in 2026.

Mid-term Outlook for USD/CHF Focus Points

The Swiss KOF leading indicator will be released later, potentially providing clues about overall economic activity trends. Market participants are closely watching the release of the December FOMC minutes, which may reveal the Fed’s policy outlook for 2026. Additionally, the US initial jobless claims data scheduled for Wednesday will be an important indicator influencing the USD/CHF trajectory.

About the Swiss Franc (CHF)

Basic Characteristics

The Swiss Franc is Switzerland’s official currency and one of the top ten most actively traded currencies globally. Its trading volume far exceeds Switzerland’s economic size, with value determined by overall market sentiment, domestic economic conditions, Swiss National Bank (SNB) policies, and other factors.

Exchange Rate System Evolution

From 2011 to 2015, the Swiss Franc was pegged to the Euro (EUR). The sudden removal of this peg led to a CHF appreciation of over 20%, causing significant market volatility. Although the peg no longer exists, due to Switzerland’s high dependence on the neighboring Eurozone, the CHF and EUR tend to remain highly correlated.

Safe-Haven Attributes

The Swiss Franc is widely regarded as a “safe-haven currency.” Investors tend to buy it during market stress. This stems from Switzerland’s international standing: a stable economy, a strong export sector, ample foreign exchange reserves, and a long-standing policy of neutrality in global conflicts, all of which help maintain the currency’s value as a safe asset. Market turbulence often boosts CHF relative to other currencies perceived as high-risk investments.

Central Bank Policy Mechanisms

The Swiss National Bank (SNB) holds four meetings annually (quarterly), less frequently than other major central banks. Its target is an inflation rate below 2%. When inflation exceeds or is expected to exceed this target, the SNB typically raises the benchmark interest rate to curb price increases. Raising rates generally benefits the Swiss Franc by increasing investment returns and attractiveness; conversely, rate cuts tend to weaken CHF.

Economic Data Impact

Swiss macroeconomic data are crucial for assessing economic health and CHF valuation. While Switzerland’s economy remains generally stable, sudden changes in growth, inflation, current account, or foreign exchange reserves can trigger CHF fluctuations. Typically, strong economic growth, low unemployment, and high confidence support CHF; signs of weakening momentum may lead to depreciation.

Eurozone Dependency

As a small open economy, Switzerland is highly dependent on the economic health of the neighboring Eurozone. The Eurozone is not only Switzerland’s most important trading partner but also a key political ally. Therefore, stability in Eurozone macroeconomic and monetary policies is vital for Switzerland and its franc. Based on this dependency, some economic models show a correlation between EUR and CHF exceeding 90%, approaching a near-perfect positive correlation.