By: Dr. Mike Campbell
Switzerland has enjoyed extremely positive reputation for discrete financial services for a very long time. It has a very mature and sophisticated financial sector. The country has seemingly always been prosperous and economically stable and when war raged all around it, Switzerland steadfastly maintained its neutrality. The nation emerged from the worst of the global financial crisis faster than most which helps the perception of Switzerland as an island of stability in turbulent financial seas.
It was inevitable that the Swiss Franc would be regarded by many as an excellent safe haven currency. Without the Swiss having “done” anything, their currency has appreciated because of its perception as a safe haven. With all the turmoil in the Eurozone in 2010 as first Greece and then Ireland were forced to accept EU/IMF bailout funding to ensure that they could meet their obligations, the Swiss Franc has appreciated by 13% over the Euro during the past 12 months.
Doubts about the strength of the US recovery have sent the Dollar to near record lows against both the Swiss Franc and the Yen. Since the Yuan is unofficially pegged to the Dollar, the Swiss currency has also appreciated against the Chinese currency. The picture in the UK is also far from rosy, with austerity measures now in place to tackle the nation’s debt burden. These measures are likely to slow the UK recovery as government spending is reined in, so the Franc has also appreciated against Sterling.
The Swiss National Bank suspended the purchase of EU and American bonds in June in a bid to minimise the appreciation of its currency. It may post a loss for 2010 since the depreciation of the Euro has devalued the bank’s foreign reserve holdings.
The high Franc is also hitting exporters as Swiss goods become more expensive in importing markets. The Swiss Franc will fall when confidence returns to the other major currencies and investors take their profits, selling the Swiss currency, but that doesn’t seem to be in sight yet.