Swiss Franc gains against US Dollar, but Fed-SNB divergence weighs

• USD/CHF turns lower as traders take profits following a strong weekly advance.
• The pair stays on track for a fourth straight weekly gain as the Swiss Franc underperforms.
• Fed-SNB policy divergence and carry-trade demand could keep the Franc under pressure.

USD/CHF turns lower on Friday as the US Dollar (USD) loses momentum heading into the weekend, with traders booking profits after a strong weekly advance driven by the Federal Reserve’s (Fed) hawkish interest-rate hike. At the time of writing, the pair trades around 0.8220 after briefly climbing above 0.8250 earlier this week, its highest level since May 2025.

The US Dollar Index climbed to a fresh seven-week high earlier on Friday as US Treasury yields rebounded after a brief pullback from recent multi-year highs. The index now trades around 100.26, retreating from an intraday high of 100.56. Meanwhile, the benchmark 10-year Treasury yield trades close to 5.00%, not far from the 2007 high of 5.04% touched earlier this week.

Treasury yields are finding support from firm Oil prices as the war in the Middle East keeps energy supply risks elevated. The Fed raised interest rates by 25 basis points to the 3.75%-4.00% range on Wednesday, delivering its first increase since 2023. The updated dot plot showed that 16 of 18 officials expect at least one more rate hike this year. As a result, the US Dollar’s downside could remain limited.

Kansas City PresidentJeffrey Schmid said on Friday that he supported this week’s rate hike as recent data suggest inflation is trending above 3%. Schmid stressed that the current inflation problem is “not just about energy,” adding that price growth has been “hot” across a broad range of goods and services. He also described the labour market as balanced and economic growth as solid.

Despite the intraday decline, USD/CHF is on track for a fourth straight weekly gain, driven largely by Swiss Franc weakness rather than broad US Dollar strength. Prospects of additional Fed rate hikes could widen the interest-rate gap with Switzerland, where the Swiss National Bank keeps its policy rate at zero. This gap makes US Dollar-denominated assets more attractive and could leave the Swiss Franc vulnerable to additional losses. Traders now turn their attention to the SNB’s monetary policy decision next week.

At the same time, the Swiss Franc is becoming more popular as a funding currency for carry trades. The Bank of Japan’s (BoJ) policy normalisation and rising Japanese interest rates make the Yen less attractive for funding such trades, pushing investors to sell the Franc to buy higher-yielding currencies.