The Swiss dilemma: how to maintain the franc and not annoy Trump

The Swiss franc, the eighth most traded currency in the world, has strengthened in recent months to historic levels against the dollar. It has risen nearly 18% against the US currency since Donald Trump entered the White House, and is at a high point not seen in more than a decade against the US currency. Although a similar phenomenon also occurred in other currencies, such as the Japanese yen, and even the shekel, the image of the franc as a “safe haven” only grew stronger, and with a debt-to-product ratio of less than 20%, it seems more stable than ever.

Lowered the interest rate on the currency to 0%

The Swiss are trying these days to look ahead to more years of geopolitical upheaval. Already last June, the Swiss central bank took a pioneering step among its peers, lowering the interest rate on the currency to 0%, against the background of its strengthening. Since then, as the trend has continued, the pressure on him to return to negative territory – that is, to “punish” investors in the Swiss franc by charging them interest – has been increasing. During many years, until May 2022, the interest rate in Switzerland was minus 0.75%.

The Swiss economy, which shows signs of prosperity, contributes to the strength of the franc. The banking system stabilized after the purchase of “Credit Suisse” by UBS Bank and the consolidation in the market. This week the bank presented huge profits of 7.8 billion Swiss francs. Swiss exports are back on track after the US lowered the draconian punitive tariffs (39%) that Trump imposed on it due to an “unpleasant” conversation (as he said) with the former president. “Our banking system and our neutrality are the main bases of Switzerland’s strength,” current President Guy Perelmin said this week at an international forum.

But the future worries the Swiss. Its problem now is different from that of most other countries: how to prevent its strong currency from hurting the economy; How to continue to prosper as a country that relies on exports, despite the strong franc, and how to avoid deflation caused by the fact that the purchasing power of the Swiss is exploding, and the prices of imports (mainly from the US and third world countries) are much lower. Even now, the annual inflation rate in Switzerland is only 0.1%.

“Inflation is currently at the lower end”

The bank has two main ways: intervening in the foreign exchange market and lowering the interest rate in the economy. “As the central bank, my biggest concern is inflation and maintaining price stability, and we are doing everything to ensure this,” said the governor of the Swiss central bank, Martin Schlegel, this week.

“Currently, inflation is at the lower end of what we define as price stability (between 0% and 2%, A. A.), and when our interest rate is at 0%, it is not an easy situation for monetary policy.”

The governor repeated several times the statement that the possibility of a negative interest rate “has already come up on the discussion table”, but the return to such territory is considered a “high hurdle” for the bank. That is – higher than the interest rate reductions he has consistently carried out since May 2023, when it stood at 1.75%. When asked about the possibility of another interest rate reduction, Balkonie answered “it is difficult to estimate”.

But the governor did not rule out the possibility of the central bank intervening in the foreign exchange markets to influence the exchange rate of the franc. This is a sensitive issue vis-a-vis the USA – Switzerland’s largest trading partner.

The US government blames Switzerland

The American administration accused Switzerland, like other countries that adopt this policy, of “currency manipulation” designed to harm it by giving an advantage to exporters.

Switzerland still has a huge trade surplus with the US (at least $40 billion a year), and is vulnerable to punitive measures by the Trump administration if it believes that the government is giving an unfair advantage to Swiss businesses. The US Treasury added Switzerland to the list of countries suspected of doing so, but later removed it.

“We are conducting a macroeconomic dialogue” with the US, the Swiss central bank announced in recent days, and tried to make it clear that any sale of the Swiss franc and use of Switzerland’s foreign exchange balances to artificially weaken it was intended to “ensure price stability” only, and not to help exporters. How the possible moves will actually be interpreted in Washington – is still unknown.