The Swiss franc appreciated significantly on Monday—at one point during the session, the currency had gained over 2% against the euro and saw an almost equivalent move against the U.S. dollar.
In recent weeks, the Swiss franc may have benefited from being seen as a “safe-haven” currency among investors and traders alike.
While other central bankers have been pursuing unorthodox monetary policy in the wake of the severe financial crises, the Swiss have shown restraint, staying relatively conservative.
Yet, the Swiss economy is relatively small, and access to its currency is somewhat limited. Therefore, on a global scale, the status of safe haven-currency has generally resided with the U.S. dollar.
Still, among European investors, the franc may be seen as the calm in the storm.
Given the tremendous economic uncertainty generated by the ongoing crisis regarding the debt situation in the European Union’s PIIGS, it may be little wonder that the franc has appreciated to such a degree.
Of course, as the franc may have begun to trade on a safety-vector, it could have adverse consequences for the broader Swiss economy.
Normally, currencies can often be seen to fluctuate on a trading vector—those countries that import more than they export might anticipate their currencies to devalue and vice-versa.
If the franc has moved away from this vector and is strictly being valued on the conservativeness of its bank’s monetary policy, it may lead to sharp distortions in the Swiss economy.
As the franc strengthens, Swiss exporters may have a more difficult time selling their goods on the world market. A strong franc means that foreign and domestic consumers may find Swiss goods to be relatively more expensive, perhaps leading them to opt for substitute goods.
Simultaneously, the Swiss consumers, with increased purchasing power, may alter their consumption patterns. This new pattern of consumption, while initially beneficial to the Swiss consumer, could do more harm than good, as it may be unsustainable in the long-run.
If headwinds in the European Union subside, traders may abandon the franc for riskier assets. In this instance, Swiss consumers could see their purchasing power rapidly decline (perhaps even faster than it increased), potentially leading to some structural imbalances in the Swiss economy.
While those who store their savings in francs may love the recent developments, ultimately the troubles in Europe may prove harmful for Switzerland.
