By Neil MacLucas

ZURICH--Switzerland's KOF leading economic indicator increased in July on signs the Alpine country's manufacturers are coming to terms with the negative effects of a stronger Swiss franc.

The index rose 10.0 points to 99.8 in July from an upwardly revised 89.8 in June, data released Thursday showed. This was well above economists' expectations of 90.8. The June level was originally reported at 89.7, its lowest level in three-and-a-half years.

The barometer, calculated by the KOF think tank, forecasts the development of the Swiss economy in about six months' time.

The increase was driven by more positive sentiment in the country's industrial and manufacturing sector, as well as in the hotel and catering industries. Indicators that covered banking, construction and domestic spending were relatively stable, KOF said.

The reading is the indicator's sixth to fully represent feeling among Swiss businesses since the Swiss National Bank repealed its cap on the franc's value against the euro. Since the surprise decision on Jan. 15, the franc has gained roughly 12% against the euro, eroding the competitiveness of Swiss exports to the eurozone.

"While the strong franc continues to place a burden on the Swiss economy, the first shockwave after the abandoning of the franc's cap is clearly losing its power," it said.

The appreciation of the franc tipped the Swiss economy into negative territory in the first quarter, data showed in May, after 13 straight quarters of growth.

Still, KOF said last month the Swiss economy could dodge a full-year recession as long as the franc steadies around levels of 1.05 against the euro, but predicts anemic growth of just 0.4% this year.

Write to Neil MacLucas at neil.maclucas@wsj.com