Why does the Swiss franc thrive in times of crisis?
According to the latest exchange data, the Swiss franc achieved a near-record high valuation against the euro last week, despite the global uncertainty caused by the eruption of war between Israel and Hamas. With this in mind, here's why the national currency of Switzerland is so resilient in times of crisis.
Swiss franc nears record valuation against euro
After faltering as a consequence of the bailout and subsequent merger of Credit Suisse, the Swiss franc has seen its value rise significantly in the last few weeks. According to Swissinfo, the exchange rate stood at 0,9457 francs to the euro on the evening of October 13, not too far away from the franc’s highest valuation of all time of 0,9409 francs to the euro - which was recorded back in September 2022.
The current exchange rate is a dramatic contrast to when the euro was first launched in 2002. In the initial few years, the so-called “super euro” saw its value increase dramatically, reaching an all-time record against the franc in 2007 at 1,7146 francs to the euro.
According to Swissinfo, some at the time were even predicting that the euro would replace the US dollar as the global currency. However, since 2007, the Eurozone has been faced with the global financial crisis, the Eurozone crisis, COVID and the war in Ukraine, which all dented the economies of the bloc and caused the euro's valuation to plummet in comparison to the franc.
Why does the Swiss franc increase in value during crises?
Speaking to the news site, an analyst for Commerzbank explained that in times of global unrest and uncertainty, investors, entrepreneurs and banks rush to so-called "safe haven" assets like the Swiss franc. Safe havens are funds or locations which are considered to be predictable and stable, and offer reliable (albeit lower) returns during periods of crisis.
The Japan Times noted that the Swiss economy remains one of the world’s most stable, with a large number of international companies calling the country home thanks in part to low taxes. This, added to the country’s policy of neutrality, makes Switzerland one of the safest bets for investors. The Swiss Bankers Association estimated that the country held 6,5 trillion US dollars in international assets in 2018 - 25 percent of all cross-border assets in the world at the time.
This also means that the franc is able to "punch above its weight", despite the Swiss economy's small size when compared to the Eurozone. At the height of European inflation in 2022, for example, commentators noted that the franc was “worth its weight in gold” as a counter against rising costs across the continent.
Why is the Swiss franc so strong at the moment?
The analyst for Commerzbank explained that the recent rise in the Swiss franc’s value can be attributed to the outbreak of war in Gaza and Israel. With such a fast-moving situation involving several major powers, financial markets remain spooked over whether the conflict will continue to escalate.
With much still up in the air in regard to what will happen next, the analyst forecast that investors will continue to veer towards safer investments like the franc until the situation becomes clearer. He concluded that it remains to be seen how long the franc will maintain its inflated value.