Weak Swiss franc holds hidden dangers

Keystone

Exports are currently riding high on the back of a weak Swiss franc, but economists warn that a sudden adjustment could damage Swiss business.

Experts cannot explain why the euro climbed to nearly 1.62 against the franc this week and all eyes will be on the Swiss National Bank (SNB) to see if interest rates rise for a sixth consecutive quarter in March.

Figures released on Thursday show a 12.9 per cent export growth last year. But the Swiss Business Federation, economiesuisse, believes the boost to Switzerland’s export industry may hold hidden dangers.

“From the macroeconomic standpoint it is inexplicable why the Swiss franc is so weak when the fundamental factors [low inflation, strong growth and high reserves] are excellent,” the federation’s chief economist Rudolf Walser told swissinfo.

“The problem is that sooner or later we will see an adjustment process and that could come unexpectedly and abruptly. Experience shows that enterprises want a gradual and smooth appreciation.”

Walser’s fears were reflected by Swiss National Bank President Jean-Pierre Roth at the recent World Economic Forum meeting in Davos.

Roth added that in the light of a healthy franc and strong economy the bank would continue its “normalisation” of interest rates.

Better than snow

UBS bank head of foreign exchange research Thomas Flury paints a more positive picture.

“I do not see anybody complaining about this situation. Export statistics are quite high, employment is going along quite nicely and the tourism sector is even doing well. It seems the weak franc is better than snow for this industry,” he told swissinfo.

One possible reason for the weakening of the franc is that the stable currency is usually more in demand during times of economic crisis, according to Flury.

“The Swiss franc has an insurance character. Currently the world economy is in a paradise-like state so you don’t need insurance and investors are not searching for a safe haven,” he said.

Some analysts believe the franc is currently a target for currency speculators, looking to buy at a bargain now and sell later at a profit, and hedge funds that borrow money in countries with low interest rate and invest where rates are higher.

“Apparently there is quite some volume [of speculation]. But hedge funds cannot steer the market, only short-term general trends,” Flury said. “I would not say they are the bad guys, they are just finding good opportunities there.”

The main reason for the SNB to raise interest rates is to control inflation, but economiesuisse does not see any need for big hikes.

“Despite increasing import prices last year, especially in the energy sector, inflation has been kept under control,” said Walser.

swissinfo, Matthew Allen

In brief

This week one euro costs the Swiss just under SFr1.62. In 2001, the same transaction would have cost SFr1.45.

In December, the SNB raised the target range for its benchmark rate – the three-month Swiss franc London Interbank Offered Rate or Libor – to 1.5%-2.5%, aiming for the midpoint of 2%.

Export levels in 2006 were at their highest for some 30 years. They grew by 12.9% – or just over 9% in real terms – reaching a total of SFr177.2 billion ($142.6 billion) and confirming a trend that began in 2003. It was the biggest rise since 1977.