The Appreciation of the Swiss Franc and its Impact on Switzerland
In recent days, the Swiss franc has strengthened against the US dollar to levels not seen in 10 years. The USD/CHF has slipped close to 0.80, a threshold missing since 2015 when the then-president of the Swiss National Bank unexpectedly removed the floor on EUR/CHF at 1.20, causing unprecedented shock in the currency markets. A Swiss franc that is too strong, especially against the dollar, creates major headaches for the Confederation. The Swiss economy depends heavily on exports, with over 10% of them directed to the United States. The rally of the franc risks depressing incomes and choking the nation’s production, leading to deflation.
The only way at the moment to try to avoid this scenario is a cut in interest rates or direct intervention in the currency market by the Central Bank. The point is that the United States would not be happy with such a move. Some years ago, the US had placed the SNB on the list of currency manipulators. The Biden administration had then removed it from the list, but President Donald Trump reinserted it.
Will the Swiss National Bank take action to combat the strong franc? An action by the SNB that is poorly received would likely trigger a US response. Bern was hit by reciprocal tariffs of 31% before the 90-day suspension on April 9th. What would happen at the end of this period if the SNB were to directly intervene in the exchange rate? It is possible that Trump would confirm the tariffs or even tighten them, worsening the situation for Swiss trade. The Swiss position is “incredibly difficult,” said Kit Juckes, chief FX strategist at Société Générale. “The Swiss government does not want significant deflationary pressures to be repeated.”
The fear of being labeled a currency manipulator could restrain action by the SNB. In the opinion of Gregor Kapferer, head of Swiss bonds at Vontobel, the central authority is “definitely concerned,” which is why “further intervention would be a last resort.” Trump, moreover, “is following the issue, so I think the SNB will be much more cautious now,” he added. Nonetheless, according to Francesco Pesole, FX strategist at ING, “if the SNB is not satisfied with the strong franc and is not limited to forex interventions, lower rates are the only option.”
Stefan Gerlach, chief economist at Efg Bank, said that “negative interest rates could well return,” adding that intervention in the currency market may also be necessary. The expert played down the chances of the United States challenging Switzerland as a currency manipulator. “It could be a problem if you lower the exchange rate to gain a competitive advantage. But it’s not a problem if your currency rises and you try to moderate the increase,” he added.
Meanwhile, this week the President and Minister of Finance of Switzerland, Karin Keller-Sutter, traveled to Washington along with the Minister of Economy Guy Parmelin for a meeting with US Treasury Secretary Scott Bessent. The three discussed “the opportunity for greater collaboration between the two countries” as reported by Sutter herself.
