USD/CHF falls near 0.8670 to avoid risks due to Middle East situation

• USD/CHF loses ground as investors are concerned about the situation between Hamas and Israel.

• Swiss Franc gains as risk sentiment emerges due to Houthi’s attacks on commercial ships.

• San Francisco Fed President Mary Daly mentioned that speculating about rate cuts in 2024 is premature.

USD/CHF continued to lose ground on the back of dovish sentiment surrounding the Middle East situation and the US Federal Reserve’s (Fed) interest rate trajectory in 2024. The USD/CHF pair traded near 0.8670 during the Asian session on Tuesday.

The situation between Israel and Hamas appears to have heated up after the Iranian-led Houthi militant group attacked commercial ships near Libya. Major shipping companies are considering avoiding the Suez Canal waterway. This has prompted a sense of risk aversion on trade and supplies, which may lead investors to the safe-haven Swiss franc (CHF).

However, the Swiss Franc (CHF) faced hurdles when the Swiss National Bank (SNB) opted to keep interest rates unchanged for a second rate hike in a row. SNB Chairman Thomas Jordan acknowledged a slight easing in inflationary pressures, stressing persistently high levels of uncertainty.

The US dollar (USD) faces challenges stemming from a weak sentiment, primarily influenced by the dovish statement from the Federal Open Market Committee (FOMC). Additionally, dovish comments from various Fed members put pressure on the greenback. However, US Federal Reserve (Fed) Bank of New York President John Williams brushed off speculation about a possible rate cut by the FOMC in March.

Additionally, San Francisco Fed President Mary Daly noted that if there were three rate cuts next year, the Fed would maintain a relatively dovish stance. It is premature to predict which meetings may witness a change in policy stance for the coming year. Daly stressed that ongoing work is underway, with the focus extending beyond simply reducing inflation to 2%.

The US Dollar Index (DXY) tries to recover its recent losses on the back of improved US Treasury yields. The 2-year and 10-year yields on US bond coupons were higher at 4.46% and 3.94%, respectively, as of press time.