With the dollar and euro reeling, the Swiss franc became a popular destination for investors looking for a more stable currency.

The franc has gained 36 percent exchange value over the euro since the end of 2009. While the US S&P downgrade has further bolstered the franc’s safe reputation in investors’ minds, the Swiss economy will not be able to support such substantial investment for much longer.  

This overhaul in investment aim has vaulted the franc past the euro and further beyond the dollar. The euro/franc exchange rate has increased over 26 percent in the latter’s favor (from 1.50 to 0.97) in only the past four months. There has been similar movement in the dollar/franc exchange rate in a lesser magnitude, shown by a 20 percent increase favoring the franc (from 0.91 to 0.73) in the same four months.  

A major pillar in franc investment appeal is based on the 2010 Swiss Government surplus of SFr 2.8 billion (USD 3.85 billion), showing a 100 percent increase from previous Swiss Federal Finance Ministry estimates. The ministry credits this success to tax revenues and budget control. Outside the EU and the euro but part of the common market through the European Free Trade Association, the Swiss are not only surpassing the US and EU with their government surplus, but managed to maintain a 2.8 percent unemployment rate. However, fear spreads that the effects of the strong franc will diminish national growth and increase further unemployment, as suspected by a State Secretariat for Economic Affairs (SECO) official.  

While a stronger currency might seem attractive, the Swiss gross domestic product (GDP) outlook has not fared well as exports have become unattractive due to the exchange rate. After an initial 2011 GDP prediction of 2.9 percent, and a 2011 first quarter report of 0.3 percent growth, the Swiss are now expecting severely diminished GDP readings closer to half the original prediction.  

The significant drop in Swiss GDP comes from suffering exports, particularly dairy. Further, the Swiss are not benefiting from the imbalance as might be expected. As described by the NZZ am Sonntag, contrary to common belief the Swiss “private bankers [are] not as well off as believed, since new assets are dominated by euro, while their cost base remains in francs.” Additionally, due to the euro zone and world-wide economic distress, Swiss tourism is also in a state of distress, thereby warranting an issuance by the SNB to urge that citizens not travel and contribute to domestic market spending on holidays.  

Measures to quell the rush to francs were initiated August 4 with SNB’s announcement of a less stringent monetary policy. SNB’s actions consisted of lowering their target ranges for the three month London Interbank Offered Rate (LIBOR) CHF to as close to zero as possible. This effort was SNB’s means of making interest rates for loans attractive to Swiss citizens, in hopes of increasing borrowing incentives. The short-term monetary goal was to allow Swiss exporters to again market products at competitive prices through the utilization of low interest loans. Specifically, SNB lowered the target rate range to 0-0.25 percent for three month LIBOR CHF. As of August 10, it resides at 0.08 percent. This is however separate from SNB’s rate for Yield on Swiss Confederation Bonds, which is now at 1.23 percent. SNB hoped this effort would aid exports through softening the currency by increasing francs in circulation, but the effect of such action did not prevent the franc from overtaking the euro. 

The SNB made public on August 10, its plan to “again increase the supply of liquidity to the Swiss franc money market,” by swelling bank’ sight deposits at the SNB by CHF 40 billion (USD 55 billion). The SNB included in their plan the involvement of foreign exchange swap transactions to speed up increased franc liquidity to better combat the strong franc. The SNB provided a cautionary note in the release about the possible outcome to their current monetary dilemma in admitting, “The massive overvaluation of the Swiss franc poses a threat to the development of the economy in Switzerland.” Any results will take time to surface. A major recurring problem is that the Swiss economy is too small to be a monetary safe haven for any large segment of the global financial services community without overheating.  

While Swiss Federal Council has done nothing but deliberate on the strong franc, former Swiss National Bank Director Georg Rich put forth support for a target exchange, stating “a temporary exchange rate target would be the only option.” In accordance with Rich, the Swiss head of state secretariat for economy’s labor division, Serge Gillard remarked that the now steady Swiss unemployment rate will rise, unless the franc’s strength returns to levels last seen in July (approximately EUR/CHF 1.23, which is not likely due to current market trends). But given the global economic distress and the current raid on the franc, any target may be difficult to achieve. 

Due to the global community’s fear of a worsening economic crisis the Swiss economy will have to be vigilant and endure the strong franc for the time being. Overall this newly acquired franc strength has not improved the Swiss economy, but instead served as an ominous sign for the security of franc investment. Given the size of the Swiss economy, its dependency on the euro and the delicate balance of its global trade, combined with its inevitable economic downturn without a reduction in the franc’s strength, it is unlikely that the currency will last much longer as the go-to safe haven investment as the world awaits a recovery.

Max Hirsch is an intern with the Atlantic Council and contributor to its web publication, New Atlanticist. He is currently pursuing a BA in Economics at Northwestern University’s Weinberg College of Arts and Sciences.