Swiss Franc Plummets as Fed Hikes Rates Amid Growing Divergence with SNB

The Swiss Franc (CHF) has plummeted over 2% in five trading days against the US Dollar (USD), reaching a 16-month low. This decline comes as the Federal Reserve (Fed) confirmed its hawkish shift, increasing monetary policy divergence with the Swiss National Bank (SNB).

The Fed hiked rates by 25 basis points to the 3.75%-4% range on Wednesday, and Chairman Kevin Warsh's press conference revealed an unexpectedly hawkish message. This has boosted expectations of at least one more rate hike before the end of the year.

Warsh stated that 'inflation remains elevated' and the 'economy appears to be strengthening,' which markets interpreted as a clear sign of further rate hikes in the pipeline. This confidence in the central bank's independence has pushed long-term yields lower, and boosted the yield on the two-year note.

The SNB is expected to maintain its benchmark interest rate at 0% for the foreseeable future, heightening monetary policy divergence with the Fed and undermining the Swiss Franc's attractiveness for speculative traders. Strategists at Societe Generale see the CHF among the preferred funding currencies for carry traders.