The Swiss franc fell to its weakest level in more than ten months as the US dollar firmed on expectations the Federal Reserve may still tighten policy. USD/CHF traded around 0.8126, extending a six-day rally, while the greenback pushed to its highest level since May 2025. The move followed last week’s “hawkish hold” from the Fed, with most policymakers indicating a rate rise later this year could be required to curb inflation pressures linked to higher energy costs. The US Dollar Index (DXY) was near 101.36, close to a one-year high.
Inflation data have kept rate expectations elevated: US CPI rose to 4.2% in May, which is more than double the Fed’s 2% target, and attention has shifted to Thursday’s PCE release. Economists forecast core PCE inflation at 3.4% year on year in May, up from 3.3% in April, and a stronger figure could bolster expectations of a September increase; markets are pricing roughly a 70% chance via CME FedWatch. Separately, uncertainty over US-Iran negotiations persisted after Donald Trump said Iran had accepted nuclear inspections, a claim Tehran rejected, supporting the dollar’s safe-haven bid.
Central Bank Policy Divergence and USD/CHF Outlook
Given the US Dollar’s ongoing rally against the Swiss Franc, we see a clear trend driven by diverging central bank policies. The Federal Reserve’s hawkish stance is a primary driver, and we must position for continued dollar strength. The US Dollar Index is trading near levels not seen since May 2025, confirming this broad momentum.
The upcoming Personal Consumption Expenditures (PCE) report this Thursday is the next major catalyst. With the latest US core inflation data holding at 2.8%, significantly above the Fed’s 2% target, a strong PCE number will reinforce bets on another rate hike. The CME FedWatch Tool is already pricing in a high probability of tight policy through the end of the year, supporting our view.
This contrasts sharply with the situation in Switzerland, where inflation is much more subdued, last reported at just 1.4%. This allowed the Swiss National Bank to cut its key interest rate earlier this month, becoming one of the first major central banks to ease policy. This growing interest rate differential between the US and Switzerland is a powerful tailwind for a higher USD/CHF.
Derivative Strategies and Geopolitical Support for the Dollar
For derivative traders, we believe buying USD/CHF call options is the most straightforward strategy in the coming weeks. This provides direct exposure to the upside potential while capping downside risk if the trend unexpectedly reverses. Selling out-of-the-money puts or put spreads could also be an effective way to collect premium, capitalizing on the view that support levels will hold.
We saw a similar dynamic in late 2022 when aggressive Fed tightening pushed the dollar higher against currencies with more dovish central banks. Historically, these periods of policy divergence can create sustained trends lasting for several months. Therefore, we may also consider longer-dated futures contracts to ride the trend.
Finally, ongoing geopolitical tensions in the Middle East continue to provide a floor for the safe-haven US Dollar. Until these risks subside, any temporary weakness in the dollar is likely to be met with buying interest. This underlying support strengthens the case for maintaining a bullish outlook on the dollar.
