Why is the Swiss franc so strong?

The Swiss Franc is strong because Switzerland has a stable economy, makes careful financial decisions, and keeps its inflation low. This means goods from Switzerland remain affordable and attractive to buyers worldwide, increasing demand for the Swiss franc. The Swiss National Bank, which oversees the country's money, works hard to keep the franc's value balanced to help both Switzerland's economy and its currency remain strong. This careful management and Switzerland's reputation for high-quality products make the Swiss franc a reliable and valuable currency.

In the picturesque landscape of global finance, the Swiss franc (CHF) rises like a peak of strength and stability, just as the iconic Alps define Switzerland's terrain. The remarkable resilience and constant value of this currency have fascinated economists, investors, and observers around the world. But what is behind this financial bulwark? The Swiss franc's journey through the years reveals a fascinating story of economic vision, prudent political decisions and inherent stability, which makes it a beacon of security in turbulent financial waters.

The story begins two decades ago, when the exchange of 1€ still cost 1.55 CHF - a stark contrast to today's exchange rate of 0.94 CHF for 1€. This significant appreciation against major currencies such as the euro, the US dollar and the British pound not only reflects market dynamics, but also a deep-rooted commitment to economic stability and prudent financial management.  

This article explores the various reasons for the strength of the Swiss franc. From its tangible influence on the export industry to its nuanced role in shaping domestic inflation rates to the decisive interventions of the Swiss National Bank (SNB), we decipher the complex relationships that make the Swiss franc a strong currency. Join us on this insightful journey and understand the underlying forces that give the Swiss franc an impressive position in the global economy.

The historic appreciation of the Swiss franc

The appreciation of the Swiss franc compared to other world currencies is simply exceptional. Over the last twenty years, the Swiss franc has experienced an unstoppable upward trend and has significantly increased in value against the euro, the US dollar and the British pound. This appreciation is not due to random market fluctuations, but is evidence of Switzerland's solid economic foundations.

In 2003, the exchange rate was 1.55 CHF for 1€. Today, one euro costs just 0.94 CHF. Such a change does not happen in a vacuum. At the heart of this phenomenon is the principle of purchasing power parity (PPP), which states that currencies adjust over time to match the prices of internationally traded goods in each country. For example, if the price of a camera rises by 2% annually in Germany, but only by 1% in Switzerland, it is becoming increasingly cheaper for German consumers to buy cameras from Switzerland. This increased demand for Swiss goods requires payment in Swiss francs, which increases the value of the currency.

The significant appreciation of the Swiss franc against the British pound is also remarkable. In 2008, you received around 2.50 CHF for 1 pound. Today, the exchange rate landscape has changed radically: For 1 pound, you get around 1.10 CHF. This sharp appreciation is clear proof of the strength of the Swiss franc and its global reputation.

Chart: Exchange rate development of the Swiss franc  

In order to visually illustrate the appreciation trend of the Swiss franc, a detailed graph will be included here showing the exchange rate of the Swiss franc against the euro, the US dollar and the British pound over the last two decades.

The principle underlying this appreciation trend is simple yet profound: The value of a currency rises in correlation with a lower inflation rate in the country. The reason is simple: With lower inflation, the costs of goods on the domestic market rise more slowly, making these goods comparatively cheaper and more attractive on the world market. As a result, demand for the local currency is increasing as international buyers try to process transactions in that currency.

The sharp appreciation of the Swiss franc reflects a wider picture. It underlines Switzerland's ability to deal with inflation and economic stability — qualities that have become synonymous with the Swiss franc. However, there were also phases in which the Swiss franc was overvalued, which created particular challenges and opportunities for the Swiss economy.

Effects of the strong Swiss franc on the export industry

Switzerland, known for its picturesque landscapes and high-quality products — from luxury watches to delicious chocolate — faces particular challenges due to the strength of its currency, the Swiss franc (CHF). The economy depends heavily on the export industry, which reacts sensitively to currency fluctuations.  

The appreciation of the Swiss franc casts a double shadow on the country's export sector and on the economy in general.

Excessive upgrade: a double-edged sword

An excessively strong franc means that Swiss products become more expensive for foreign buyers. This price increase may scare off international customers and lead to lower demand for Swiss exports. Tourism and key industries such as the mechanical, electrical and metal industries, which are among the pillars of the Swiss economy, are particularly affected.

• Tourism: Switzerland's attractiveness as a travel destination is undisputed. However, as the Swiss franc appreciates, costs for international tourists are rising, making Switzerland less attractive compared to neighboring countries. This may result in a decline in revenue from tourism, which is an important part of the Swiss economy.
• Mechanical, electrical and metal industries: These sectors, which account for an important part of Swiss exports, are struggling with competition problems abroad. With the appreciation of the Swiss franc, prices for machines and technologies manufactured in Switzerland are becoming less competitive internationally, which can lead to loss of market share and loss of earnings.

Strategies against currency effects

The resilience of the Swiss export industry lies in its strategic response to currency strength. Innovation, quality and dominance in niche markets are opportunities for Swiss companies to cushion the negative effects of a stronger Swiss franc. With its focus on high-quality production, cutting-edge technology and tailor-made services, Swiss industry strives to offer added value that justifies the premium price, regardless of currency fluctuations.

Strong Swiss franc and domestic inflation

The other side of the coin shows a positive aspect of the strength of the Swiss franc, particularly with regard to inflation. A stronger franc makes imports cheaper, which is an advantage for a country like Switzerland, which depends on importing goods, including essential goods such as crude oil and natural gas.

Buffer against international price increases

In 2022, the world was faced with a sharp rise in oil and natural gas prices. In Switzerland, the effects were somewhat cushioned thanks to the strong Swiss franc, which made the purchase of these raw materials in foreign currencies cheaper. This effect in turn dampened the inflationary pressure that Swiss consumers were exposed to. As raw materials and goods from abroad become cheaper, the cost of living - apart from expensive domestic services - remains relatively stable overall, which provides protection against inflation.

But it's important to find a balance. While cheaper imports can dampen inflationary pressure, they can also have a negative impact on domestic producers, who face tougher competition from cheaper foreign products.

A tightrope walk: The role of the Swiss National Bank

The Swiss National Bank (SNB) plays a crucial role in overcoming these challenges. Through a prudent monetary policy, the SNB strives to keep inflation low and manage the strength of the currency in order to ensure the stability and resilience of the Swiss economy as a whole.

The role of the Swiss National Bank for a strong currency

The Swiss National Bank (SNB), Switzerland's central bank, has control over the strength of the Swiss franc. Your strategic manoeuvres and monetary policy decisions are crucial for maintaining economic stability and ensuring that the value of the Swiss franc serves the general interests of the Swiss economy.

Long-term strategy for low inflation

It is one of the SNB's basic principles to keep the average inflation rate low by international standards. This is a deliberate strategy to create a favourable environment for the long-term appreciation of the Swiss franc. By ensuring price stability in Switzerland, the SNB is supporting the purchasing power of the Swiss franc and strengthening its attractiveness as a “safe haven” in times of global economic uncertainty.

Short-term monetary policy measures

In addition to the long-term inflation target, the SNB is also implementing short-term interventions to directly influence the value of the Swiss franc. This includes selling foreign currency to appreciate the franc, or introducing negative interest rates to deter investors from holding too many francs and thus controlling the strength of the franc.

Recently, the SNB has taken measures to support the appreciation of the Swiss franc, with the aim of reducing import prices and curbing inflation in Switzerland. These measures illustrate the SNB's difficult tightrope walk: it must ensure that the Swiss franc does not become too strong, which would damage the export sector, and at the same time use its value to keep inflation under control.

Case study: Combating inflation through currency appreciation

A specific example of the SNB's proactive approach was its response to the global rise in oil and gas prices in 2022. By allowing the Swiss franc to appreciate, the SNB effectively protected the Swiss economy from the full effects of these price increases. The stronger franc made imports of energy commodities cheaper and dampened inflationary pressure, which could otherwise have escalated.

The role of the SNB: walking a tightrope

The role of the Swiss National Bank goes beyond mere currency management: it is the guardian of Switzerland's economic well-being. Through prudent monetary policy decisions, the SNB steers the Swiss economy through the dual challenge of maintaining export competitiveness and keeping inflation under control. This complicated balancing act requires a nuanced understanding of both domestic economic conditions and global financial trends, which underscores the SNB's key role in strengthening the Swiss franc and ensuring the nation's prosperity.

conclusion

Backed by the stable Swiss economy, prudent financial policy and the strategic vision of the Swiss National Bank (SNB), the Swiss franc remains a bulwark of strength in the turbulent landscape of world currencies. Its rise against major currencies over the last two decades is not only a story of economic triumph, but also a testament to Switzerland's continued emphasis on stability, innovation and quality.

The strength of the Swiss franc is a double-edged sword: While it protects the economy from inflation and strengthens purchasing power, it also poses a challenge for export-oriented industries. The complicated balance that the SNB is striving for between promoting a strong currency and dampening its impact on the overall economy illustrates the nuanced requirements for maintaining economic balance in an interconnected world.

Through strategic interventions and a long-term commitment to low inflation, the SNB has cleverly managed the value of the Swiss franc and ensured that it serves the country's economic interests. This careful balancing act not only preserves the appeal of the Swiss franc as a “safe haven,” but also underlines Switzerland's resilience to global economic fluctuations.

Thinking about the future

As the global economy evolves and new challenges arise, the SNB's role in managing the Swiss franc will undoubtedly remain central. The continued commitment to economic stability, paired with strategic flexibility to adapt to changing global dynamics, will be crucial to maintaining the strength of the Swiss franc. Even though the future is unpredictable, the fundamentals of the Swiss economy and the leadership of the SNB give rise to cautious optimism about the continued strength and stability of the Swiss franc.

The story of the strength of the Swiss franc is a compelling narrative of economic wisdom, strategic policy, and the relentless quest for balance. As we look to the future, the Swiss franc's journey will undoubtedly continue to captivate and inspire those navigating the complex world of global finance.