In the eyes of the world's currency traders, Switzerland is golden again.
The Swiss franc jumped nearly 2 per cent against the U.S. dollar Monday, its biggest gain in nearly two months, as continued jitters over U.S. and euro-zone debt troubles sent investors once again scurrying for safety. Fears over the health and stability of many of the world's leading reserve currencies – the U.S. dollar, the euro and the Japanese yen – have sent the Swiss currency up more than 30 per cent in the past year, to unprecedented highs against the U.S. dollar.
It's been something of a renaissance for the long-respected currency, whose public profile had been reduced by the rising importance of the euro over the past decade. While the Swiss franc isn't alone in benefiting from the woes of the greenback and euro (other smaller currencies, including Canada's, have gained), the franc's rise is different. It has resumed its historical status as the next-best thing to gold.
"It's still seen as a gold proxy," said Jack Spitz, director of foreign-exchange trading at National Bank Financial.
Up until the late 1990s, Swiss law required that at least 40 per cent of the Swiss central bank's currency reserves be held in gold – forming a strong link between the value of gold and the Swiss franc. While the central bank has sold gold in recent years and now holds less than 20 per cent of its reserves in gold, it is still required constitutionally to maintain gold reserves as part of its backing of the currency – and still has a much larger gold component to its reserves than most major central banks.
The association between gold and the Swiss franc has resulted in the two moving upward along very similar trajectories over the past year.
But lately, market strategists note, the Swiss franc has been outperforming even gold as the economic and fiscal stability of Switzerland has added to its lustre as a currency haven for nervous traders who are running out of other attractive options.
"Switzerland seems to be an increasingly isolated safe haven among currencies," said economist John Higgins of Capital Economics in London. "The other countries' status as safe havens has been eroded. What else is left?"
This view could be gaining steam among the world's major central banks, too, as these big holders of currency look to diversify their reserves away from the U.S., euro zone and Japanese currencies. The Swiss franc accounts for a mere 0.1 per cent of the world's central-bank currency reserves, according to recent International Monetary Fund figures, about one-quarter of its share of global reserves before the euro was created – suggesting there is room for more central-bank buying of the franc.
"If other central banks become more concerned about the outlook in the major developed economies, the franc could benefit considerably," Mr. Higgins wrote in a recent report.
The Swiss franc's tiny share of global currency reserves suggests it's not much of a threat to take over as a major reserve currency, but it has always held a more significant role among traders. The franc was the fifth-most-traded currency in the world last year, accounting for more than 6 per cent of all trades – and is seen as a traditional defensive trade in the forex market.
"It has never been much of a reserve currency," said Stephen Sapp, professor of finance at the Richard Ivey School of Business at the University of Western Ontario. "It has always been seen as a safe haven in times of trouble."
Some traders believe the franc has become overvalued at current levels – but that doesn't mean they think it's due for a pullback, as long as the other major currency options remain troubled.
"You could have made the argument that it was overvalued many months ago," Mr. Spitz said. "But it's all relative to other currencies.
"The market is comfortable right now being short the U.S. dollar. That means buying other currencies – and the Swiss franc is the most prominent right now."
Switzerland, much like Canada, has become increasingly concerned about the impact of its surging currency on the country's export sector, which accounts for about half of the country's gross domestic product. But while the Swiss central bank has a long track record of intervening to manage the value of the franc – and did so as recently as last year in an attempt to cool the currency – experts don't expect the central bank to try to halt the currency's rise any time soon.
"They realized it was costing them a lot of money," said Mr. Sapp. "They were trying to hold back a tide with a broom."
The Australian dollar hit $1.10 (U.S.) on Monday. Experts have been cautiously floating the idea that the U.S. dollar might have lost its status as the world's reserve currency, carving a possible new role for the Australian dollar in this risk-averse climate.
Brazil's real soared 0.7 per cent, to 1.5 to the U.S. dollar on Monday, its highest level since 1999. The jump came despite efforts by the Brazilian government to slow the currency's rise, which could make exports costly and hurt the economy. Brazil's central bank has brought in a financial transaction tax in an attempt to discourage speculative investments from abroad.
New Zealand dollar
New Zealand's dollar held above 86.42 (U.S.) cents on Monday, the highest point since 1985, as buyers seek alternatives in the face of Washington's debt ceiling uncertainty. The kiwi, as it is informally known, has been this month's biggest winner, edging up against most major currencies. Some currency experts think it's possible the currency will hit par with the greenback.
While the hunt for higher interest-rate yields has boosted the kiwi, there are worries this may threaten profits and dampen economic growth by making New Zealand goods less competitive overseas. The Reserve Bank of New Zealand is likely to be the next central bank to raise interest rates.
Sweden's krona soared to 6.34 per U.S. dollar on Monday, the highest in three weeks, amid European worries about the integrity of the euro and the debt crisis of some euro-zone members. The stronger krona has undercut the revenue of Swedish companies such as Ericsson, the international telecom equipment-making giant.