When markets turn nervous, a handful of assets tend to attract money. Gold is one, US government bonds are another, and the Swiss franc is often on the list. Traders call these safe havens. For beginners, the idea that a small country’s currency could play such a big role in global markets can seem strange. The reasons are partly economic, partly historical and partly about habit.
What a safe haven is
A safe haven is an asset investors expect to hold its value, or even rise, when markets are under stress. Our guide to safe haven assets explains the wider idea. The Swiss franc earns its place for a few specific reasons.
A strong economy and steady finances
Switzerland has a wealthy, diversified economy, low government debt compared with many other developed countries and a long record of political stability. The country also tends to run a current account surplus, meaning it earns more from the rest of the world than it spends abroad. Investors see a currency backed by those qualities as less likely to suffer from a sudden crisis.
Low inflation and a credible central bank
The Swiss National Bank has a reputation for keeping inflation low. Over many decades, the franc has tended to hold its purchasing power better than many other currencies. When investors fear inflation or instability elsewhere, a currency with that track record can look appealing.
Neutrality and history
Switzerland’s long tradition of political neutrality and its history as a centre for banking and wealth management add to the franc’s image. Some of this is reputation as much as economics, but in markets reputation matters. If enough investors believe something is a safe haven and act on that belief, it tends to behave like one.
How the franc behaves in practice
During periods of stress, such as financial crises, geopolitical shocks or sharp falls in share markets, the franc has often strengthened against currencies seen as riskier. Traders sometimes watch pairs such as EUR/CHF and USD/CHF as gauges of how nervous the market feels.
It is not a perfect relationship. The franc does not rise every time markets fall, and other forces, such as interest rate differences, can matter more on any given day. In recent years, the US dollar has also attracted safe haven flows during some episodes, and the two can compete.
The central bank does not always welcome the strength
A stronger currency sounds like good news, but for an export-heavy economy like Switzerland’s it can hurt. Swiss watchmakers, drug makers and machinery firms sell much of their output abroad, and a soaring franc makes their goods more expensive for overseas buyers. It can also push inflation too low.
For that reason, the Swiss National Bank has a history of trying to restrain the franc. It has bought foreign currencies to weaken it and, at times, cut interest rates below zero. The most famous episode came in 2015, when the bank suddenly abandoned a minimum exchange rate it had defended against the euro. The franc jumped sharply within minutes, causing heavy losses for some traders and brokers. Our guide to FX intervention risk explains why central bank action can upend currency trades.
Interest rates still matter
Because Swiss interest rates have often been lower than those in other major economies, the franc has sometimes been used as a funding currency, borrowed cheaply to buy higher-yielding assets elsewhere. When markets panic and those trades are unwound, the franc can rise quickly. Our explainer on how interest rate expectations move FX covers why the rate gap between countries shapes currency flows.
The takeaway
The Swiss franc is seen as a safe haven because of Switzerland’s stable economy, low debt, low inflation and long reputation for reliability. It often strengthens when markets are under stress, but the relationship is not guaranteed, and the Swiss National Bank has shown it is willing to step in.
If you want to see how well you understand the forces behind currency moves, our free trader assessment can show you where to focus next.
