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What Happens When Your Currency is Too Popular?

With the threat of continuing uncertainty over Greece and the depreciation of the Euro, investors are increasingly seeking safe havens to park their money. Switzerland has long been such a safe-haven, with its neutrality and socio-political stability making it an ideal minimal-risk refuge. This is – in part – a good thing, as it confirms the widespread international trust in the Swiss government: a major plus for the banking nation. Despite this, Switzerland is actually in a dilemma – its currency is too popular.

This may sound like a first world problem, and to an extent it is; however, the steady appreciation of the Swiss franc (CHF) means that Swiss exports are becoming too expensive. Higher export prices discourage foreign buyers, which negatively impacts Switzerland; which relies on exports of big ticket items such as chemicals, pharmaceutical, watches, and other precision instruments. Another result of the strong franc is that foreign direct investment (FDI) is drying up, as the costs of investing in the country become too high for potential investors.

To counter this trends, the Swiss National Bank (SNB) has already taken various measures to weaken demand for the franc, such as the unusual public announcement of its intervention to rein in the currency.

Comments from the SNB on currency interventions are very rare and therefore signal more ‘verbal activism’ from the SNB,” Credit Suisse analyst Maxime Botteron

The SNB has also introduced negative interest rates in order to discourage people from holding large amounts of Swiss francs. In other words, people who hold francs are currently having to pay banks to continue doing so, as opposed to the more common phenomenon of banks paying customers interest on their deposits. The SNB has also introduced penalties for holding large amounts of francs in cash.

Interestingly, aside from the usual pressures from foreign investors seeking a safe haven, much of the appreciation of the franc is due to domestic pressure. Swiss citizens and businesses are also hoarding francs as widespread uncertainty about the direction of European fiscal policy and the Euro discourages portfolio diversification.

About Jeremy Luedi

Jeremy Luedi
Jeremy Luedi has an Honours Bachelor's Degree, consisting of an Honours Specialization in Political Science and Major in History. Born and raised in Switzerland, Jeremy is a dual citizen and speaks German. His distinctive writing style shows the level of commitment he puts into writing. In addition to writing, he also enjoys rock-climbing, reading and anime. Contact Jeremy: jeremy.luedi@youthindependent.com