The Swiss Franc Trumps Both the Dollar and Euro

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 |  Includes: FXE, FXF, UDN, UUP
by: Investment U

By Jason Jenkins

You won’t read any Switzerland “neutrality” jokes here.

However, the Swiss franc is a safe harbor for investors terrified of the sovereign debt problems faced by the United States and the Europe Union.

It’s risen 30 percent against the U.S. dollar so far in 2011. While the euro is down 15 percent against the franc over the last year.

So why does Switzerland seem so attractive and why is there confidence that if one places his money in the franc, he’ll get it back?

Why Currency Traders Prefer the Franc

Currency traders prefer the franc because Switzerland has a current account surplus – and this broad measure of trade signifies that the Swiss don’t have to rely on foreign capital or outside creditors to fund a trade deficit, like the current situation the United States finds itself in.

The Swiss economy looks strong in comparison to the economies of the United States and the European Union. Currently, Switzerland’s low three-percent unemployment rate compares favorably with 9.9 percent in the 17-member Eurozone and 9.2 percent in the United States.

It also helps that it’s close to one of the most robust economies in the world, Germany, which buys about 20 percent of its exports.

However, if you’re using the Swiss franc as a safe harbor, it might not be the perpetual gift that keeps on giving.

Because of its historic strength against the dollar and euro, the Swiss cabinet is on the lookout for a possible economic slowdown in the next 12 months. The cabinet stated that the franc is in an over-valued phase.

There’s a usually a lag between exchange-rate appreciation and the effects on the economy.

How to Invest in the Swiss Franc

Switzerland is seeing signs of a slowdown in the export sector, and corporate profit margins are coming under pressure because of the global nature of many Swiss businesses. So far efforts by the Switzerland Central Bank haven’t hindered the franc’s rise.

It’s believed that this short-term rise is justified, but long-term increase would be seen as questionable.

  • Of course we could see a swift depreciation of the Swiss franc to euro if the Union gets its act together and addresses its inabilities to deal with the restructurings of Italy and Spain.
  • The Swiss franc could get some relief against the dollar if Congress can agree on a long-term deficit reduction agreement. But let’s be honest. Neither of these scenarios seems feasible.

In the short term, this appears to be a safe bet. However, within a year you might want to reassess the world’s political climate.

One of the easiest ways to invest in the Swiss franc is through the CurrencyShares Swiss Franc Trust (NYSE: FXF). The main purpose of the trust is to track the currency in a way that reflects having a money market account denominated in Swiss francs – and that includes interest.

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