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The Swiss franc has surged to its strongest level against the US dollar in more than a decade, as a stampede into what traders are calling currency markets’ last “reliable” haven poses an increasing problem for the Swiss National Bank.
The Alpine currency is already up more than 3 per cent this year to stronger than SFr0.77 against the dollar, after a 14 per cent gain last year, as political risks drive investors to look for alternatives to the US currency. That has taken the franc to its strongest against both the dollar and the euro since a shock appreciation in 2015.
The rally threatens to push down on prices in a country with an annual inflation rate of 0.1 per cent, and may have further to run, according to some analysts.
This surge shows “the Swiss franc is the one reliable safe haven currency of choice for global investors,” said Derek Halpenny, head of research in global markets at MUFG. “That fact alone is likely to draw further haven demand ahead.”
A political crisis over the future of Greenland last week has reawakened concerns over the dollar, the linchpin of currency markets, as investors fret over the Trump administration’s erratic policymaking and the independence of the country’s central bank. The yen, another traditional haven during times of market stress, has been volatile amid investor anxiety over a relentless sell-off in Japanese government bonds.
But a major beneficiary has been the Swiss franc, historically a refuge for global capital because of the country’s political and economic stability and low levels of debt. It has been swept up in a global rush for havens that has propelled gold above $5,000 a troy ounce this week.
“The Swissie looks a bit like a gold nugget,” said Daniel Kalt, chief investment officer for Switzerland at UBS Global Wealth Management. “It doesn’t yield you anything. But there’s a rock-solid economy behind it.”
Kalt said the key exchange rate to watch was the franc against the euro, given the large share of the country’s trade that is with the bloc. If the euro fell below SFr0.9 — from SFr0.918 currently — that would put Swiss exporters under pressure and “trigger some difficult conversations” for authorities, he said.
One option for the central bank is cutting interest rates, which are currently zero, to reduce the attractiveness of the currency. In recent days, traders have started to price in a roughly 10 per cent chance that the SNB could make a quarter-point cut by its June meeting, according to levels in swaps markets.
However, the central bank has previously said it does not want to revive its eight-year policy of negative rates.
Economists also warn that a small cut might do little to dull the relative attractions of Swiss assets, given the large gap that already exists between Swiss and Eurozone government bond yields, while providing an unwanted boost to the economy.
“A larger cut would risk overstimulating an economy that doesn’t need it,” said Karsten Junius, chief economist at Swiss bank Safra Sarasin.
Another option, of intervening directly in the currency, is also problematic, say investors, given that repeated past interventions to weaken the franc led to the country being added to a US list of “currency manipulators” in President Donald Trump’s first term, before later being removed.
After the SNB conducted a modest intervention in the second quarter of last year amid trade war volatility, the US and Switzerland issued a joint declaration in September that they would not intervene in currencies for competitive advantage.
The statement, which recognised that interventions were a valid tool for addressing currency volatility, was viewed by some as a US recognition that some level of intervention by Switzerland would be acceptable.
But “the SNB has to be more careful about how it intervenes,” said one economist. Putting a floor under the euro-franc rate “would sit awkwardly with the communiqué”, the person said.
The SNB declined to comment.
Another beneficiary of the dollar’s decline has been the euro, which hit a four-year high on Tuesday above $1.19. Some European policymakers have been vocal about giving the single currency a bigger role in global markets, but its recent strength has triggered similar warnings about the potential to depress inflation.
“These moves are a significant tightening of financial conditions in the euro area and the ECB will want to lean against them,” said Tomasz Wieladek, chief European macro strategist at asset manager T Rowe Price.
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