Due To Tariff Effects, Swiss Franc Strongest In 10 Years...Going To Negative Interest Rates?

Currency exchange in Geneva, Switzerland (Source: Reuters)

The Swiss franc has been spotlighted as a safe asset due to the impact of the global trade war, recording its highest level against the dollar in 10 years. On the 27th (local time), the Financial Times reported that the Swiss franc exchange rate reached 0.80 francs per dollar. This is the first time since the Swiss National Bank (SNB) abruptly withdrew its euro-peg policy in 2015, causing a surge event.

Amid the foreign trade war led by President Trump, uncertainty in the U.S. financial market has increased, causing the dollar's value to plummet, and the Swiss franc to surge in response. Switzerland has a highly export-dependent economic structure, so if the franc's strength continues, it can impose a significant burden on the entire export industry. Furthermore, there is a possibility that the U.S. may impose a 31% reciprocal tariff on Swiss products, putting the monetary authorities in a more difficult situation.

Societe Generale's Chief Foreign Exchange Strategist Kit Juckes stated, "Given such conflicting pressures, the Swiss National Bank is in an extremely difficult position," adding, "The government aims to prevent a recurrence of deflation." Experts warn that the rapid rise of the Swiss franc could lead to a deflation shock. Switzerland has previously experienced curbing franc strength through negative interest rates.

Currently, Swiss short-term government bond yields have entered negative territory, and investors expect the SNB to soon proceed with interest rate cuts. ING's Foreign Exchange Strategist Francesco Pesole said, "If the SNB, dissatisfied with franc strength, is restricted in foreign exchange market intervention, an interest rate cut will be the only option." EFG Bank's Chief Economist Stefan Gerlach also left open the possibility of negative interest rates and mentioned the need for monetary intervention.

Switzerland had previously raised interest rates to curb the inflation surge after the pandemic but is now likely to return to an accommodative monetary policy during this trade war situation. FT projected that the SNB would try to avoid diplomatic conflicts through additional interest rate cuts instead of directly intervening in the market.