The Swiss franc's rise in the wake of the Sept. 11 tragedy has been remarkable. While the dollar is broadly lower, the Swiss franc is at record highs vs. the euro, with Swiss franc gains vs. the dollar leapfrogging the euro's gains over the dollar. The rationale? The Swiss franc is the safe-haven currency when the U.S. is under attack, in a recession and running a current account deficit.
No doubt the U.S. imbalances, such as the recession and current account deficit, and the attack's occurrence within U.S. borders leave the dollar vulnerable, but the move up in the Swiss franc is unsustainable. It should see a significant reversal emerge ahead.
No Strength Needed
First, the Swiss economy doesn't need a strong currency now. Growth is slowing with the rest of Europe, and exporters, a key component of the economy, can ill afford a strong currency compared with their major trading partners.
Monday's surprise 50 basis-point rate cut by the Swiss central bank (the second since the U.S. tragedy) speaks volumes of how vulnerable Switzerland is to a strong currency in the current global slowdown. With the central bank squarely on the side of a weaker Swiss franc, an appreciating currency will be resisted, limiting upside potential.
Equally -- if not more -- important is the pressure, already evident in PresidentBush's remarks Monday, on Switzerland to make Swiss banking more transparent.The Swiss press is filled with reports of money flowing into the country from institutions and individuals who are fearful their assets will be frozen because of allegations of their affiliation with or support of suspected terror mastermind Osama bin Laden and the Taliban.
Bush said the U.S. will freeze domestic assets of any one affiliated with terrorism and any one supporting terrorism, and will go after banks that support terrorist networks. Surely those investors seeking to shelter their capital from possible seizure by the U.S. or its allies by buying Swiss francs in the past week were forewarned. In his statement Monday, Bush said some European countries will need to change their banking laws -- an obvious reference to Switzerland and perhaps Andorra and Channel Islands.
Swiss authorities will be hesitant to relax bank secrecy laws, which could risk their comparative advantage in this service-based sector. One could also envision pressure on Swiss banks doing business in the U.S. and elsewhere if it is determined that terrorists and their supporters continue to have access to funds in Switzerland.
It seems certain that the status quo will not be tolerated. Some watering down of secrecy laws will surely be forthcoming.
With most of Europe expected to play a part in the U.S. war on terrorism, no country in Europe will be neutral. While Switzerland will not have a military role to play, it may well be pressed to show its support by handing over information on accounts and seizing funds of those involved in terrorism.
Terrorists and their associates probably don't hold enough francs to decide the fate of the currency. But yielding on bank secrecy laws to isolate terrorists will leave others vulnerable to greater transparency. Here again, perception matters. The perception of Switzerland losing much of its safe-haven appeal and a central bank fiercely opposed to a stronger currency are likely to resonate ahead and deliver a sharply lower currency.
David Gilmore is an economist and partner of Essex, Conn.-based Foreign Exchange Analytics, a currency markets advisory service for institutional investors. Neither the author nor Foreign Exchange Analytics trades in the currency markets. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to