The geopolitical situation heats up, helping the Swiss franc strengthen, with USD/CHF pressured and falling back to 0.7880

Amid the rising global risk sentiment, the Swiss franc, as a traditional safe-haven currency, is attracting significant capital inflows. During Tuesday’s Asian trading session, the USD/CHF exchange rate experienced a pullback after two days of gains, currently trading around 0.7880, not far from the key resistance level at 0.7900. Market focus is on the release of Switzerland’s KOF leading indicator, which often signals the future direction of overall economic activity.

Geopolitical Tensions Reignite, Safe Asset Demand Surges

The Ukraine-Russia conflict continues to escalate, with the Russian Foreign Ministry stating that Moscow’s negotiating stance may change due to alleged attacks targeting President Putin’s residence. Meanwhile, tensions in the Middle East are worsening, with Saudi Arabia conducting airstrikes in Yemen and Iran announcing a “full-scale war” with the US, Europe, and Israel, sparking concerns over broader geopolitical instability. Trump has issued warnings that Iran will face further strikes if it resumes its nuclear program.

These series of uncertainties have driven up demand for safe-haven assets. Switzerland, with its stable economic foundation, developed export sector, ample central bank foreign exchange reserves, and long-standing neutral stance in global conflicts, naturally becomes the preferred investment choice during risk aversion periods. In turbulent market environments, the Swiss franc typically appreciates against other currencies perceived as riskier, exerting pressure on the USD/CHF exchange rate.

Weakening US Dollar Weighs on Exchange Rate; Federal Rate Outlook Uncertain

Another obstacle for the dollar comes from expectations of future rate cuts by the Federal Reserve. The market generally anticipates two rate cuts by 2026. According to the latest data from CME FedWatch, the probability of the Fed holding rates steady at the January meeting 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%.

This cautious outlook on the dollar is eroding its purchasing power. When the Fed is widely expected to cut rates, the attractiveness of dollar-denominated assets diminishes, prompting investors to reallocate into other currencies. The upcoming release of the Federal Open Market Committee (FOMC) December meeting minutes later today may provide further insights into the Fed’s policy outlook for 2026.

Key Data Releases This Week, Investors Remain Cautious

Market participants are awaiting the US initial jobless claims data due on Wednesday. This labor market indicator is crucial for assessing the resilience of the US economy and could reignite discussions about the Fed’s policy path. Until these uncertainties are resolved, traders tend to adopt a cautious stance, which also explains the recent weakness of USD/CHF.

Swiss Franc: From Nominal Liquidity to Substantive Safe-Haven Value

The Swiss franc (CHF), as one of the top ten most traded currencies globally, has a daily trading volume far exceeding the actual size of the Swiss economy, demonstrating its importance in international finance. The value of the franc is influenced by overall market sentiment, the health of the Swiss economy, and the policies of the Swiss National Bank (SNB).

Between 2011 and 2015, the Swiss franc was pegged to the euro, but this linkage was abruptly解除 in 2015, after which the franc appreciated over 20% in the short term, causing global market turmoil. Although the exchange rate regime has changed, due to Switzerland’s high dependence on neighboring eurozone countries, the CHF and euro tend to move closely together. For investors seeking to understand the EUR/CHF rate, this tight correlation (with some models showing over 90% correlation coefficient, nearly perfect positive correlation) is an important reference.

SNB Monetary Policy Framework and CHF Support Mechanism

The Swiss National Bank holds four policy meetings annually (once per quarter), a lower frequency than other major central banks. The SNB sets an annual inflation target below 2%. When inflation exceeds the target or is expected to do so in the near term, the central bank raises its benchmark interest rate to curb price increases.

Rising interest rates generally benefit the Swiss franc because they increase returns on CHF-denominated assets, making Switzerland more attractive to international investors. Conversely, declining interest rates tend to weaken the franc.

Swiss Economic Data and CHF Value Interaction

Economic data releases within Switzerland are vital for assessing economic performance, and any unexpected changes can trigger CHF fluctuations. Strong economic growth, low unemployment, and high investor confidence generally favor the franc; on the other hand, signs of economic slowdown tend to put downward pressure on the CHF.

As a small open economy, Switzerland’s prosperity largely depends on the economic conditions of neighboring eurozone countries. The EU is not only Switzerland’s main trading partner but also an important political ally. Therefore, macroeconomic and monetary policy stability in the eurozone is crucial for Switzerland and its franc. Some economic models suggest that the co-movement between the euro and CHF reaches or exceeds 90%, approaching a near-perfect positive correlation.