Swiss National Bank’s Currency Strategy Under Scrutiny
The Swiss National Bank (SNB) presents a unique case in the realm of central bank reserve management, particularly concerning currency preferences. Notably, the US dollar seems to be getting sidelined.
This year, the ongoing challenge of combatting the powerful Swiss franc’s deflationary impact has intensified, especially after the tariff-related shocks from the US in April prompted a surge in demand for safe-haven assets like gold and the franc.
In June, the SNB reduced its policy rate back to zero as Switzerland’s annual inflation dipped into negative territory for the first time in four years. They swiftly intervened in the open market to weaken the franc as inflation rose early in the second quarter.
Recent updates from SNB’s quarterly balance sheet reveal it had acquired 5.06 billion Swiss francs (around $63.6 billion) in foreign currency from April to June. Remarkably, much of this intervention seems focused on buying euros.
After the franc rallied against both the dollar and the euro in April, the increase was markedly more significant against the dollar, which has continued to climb since then. Conversely, the Euro/Franc exchange rate has remained relatively stable at about 0.93 over the past six months. This has led many to infer that the SNB’s recent activities have concentrated on euro acquisitions. A review of their balance sheet indicates that euro holdings now exceed dollar reserves for the first time since 2020, with the euro accounting for 39% and the dollar 37% of assets.
Société Générale strategist Olivier Colber noted this significant shift demonstrates that the SNB is prioritizing the prevention of euro/franc depreciation.
According to the SNB’s trade-weighted currency basket, the euro comprises 42% while the dollar makes up just 14%, allowing for further adjustments in their currency strategies.
Intervention Motivations
The backdrop of tense US-Swiss trade relations, most notably the 39% tariff imposed by Washington on Swiss goods in August, complicates SNB’s dollar purchases as there is apprehension about re-igniting allegations of currency manipulation for trade benefits.
This week, an extraordinary joint statement from the SNB, the Swiss Treasury, and the US Treasury emphasized their non-targeting of exchange rates for competitive advantage. They asserted that interventions in the foreign exchange market serve as a crucial monetary policy tool for maintaining financial stability and fulfilling their price stability obligations.
This could imply a degree of flexibility for the SNB in selecting intervention currencies while highlighting the sensitivity of currency issues in US trade discussions.
Many analysts believe that a key objective of the Trump administration’s broader trade strategy is to challenge the perceived overvaluation of the dollar.
SocGen’s Korber remarked that future SNB foreign exchange interventions will likely focus on the euro, leaving the dollar/franc relationship more vulnerable to market forces.
Additionally, last week’s announcement from Trump regarding 100% tariffs on imports of branded or patented drugs—unless production facilities are located in the US—has added another layer of complexity to trade discussions.
This development was further complicated by an agreement between Washington and Pfizer, which greatly impacts Swiss pharmaceutical giants like Roche and Novartis.
Although this swift transaction has unfolded, Swiss authorities likely prefer to avoid complicating the substantial dollar interventions at this juncture and are cautious about future negotiations.
Why does the currency balance beyond the Swiss border matter? One might argue that the growing protectionist sentiment from Washington could significantly influence how central bank reserve managers intervene in currency markets and manage those reserves.
The impact is substantial, as the IMF recently reported that central banks hold nearly $13 trillion in assets globally, with 56% still denominated in dollars.
Moreover, the SNB has amassed substantial reserves across its foreign assets—two-thirds consist of government bonds, with stocks making up about 25%, predominantly US mega-cap equities.
Shifting currency allocations could also entail reallocating where these assets are held, potentially leading to broader repercussions across global markets.
