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By Angelique Ruzicka
Updated
The US Dollar is in danger of losing its spot as a top safe-haven currency if speculation that a hawkish Swiss National Bank (SNB) is planning to raise interest rates in September proves to be correct.
Reuters highlighted that newspaper Schweiz am Wochenende said the central bank was planning a rate hike of 50 basis points to 0.25% from -0.25% on 22 September.
The US dollar has outperformed the Swiss Franc by 5% year to date (YTD). However, some feel that there could be a leadership change among the FX haven ranks as the anticipated recession approaches.
There are already some indicators of the increasing strength of the Swiss franc. In June the Swiss franc was the best-performing major currency, rising against the US dollar as well (USD/CHF). So, could the Swiss franc take the place of the US Dollar and become the best safe-haven currency this year?
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Our of all the hard currency to choose from, the US dollar is the most sought-after currency in the world – this is even though America holds trillions of dollars in foreign debt and has a large deficient. This is because there is global trust that America has the funds and economic strength to meet its debt obligations. This is one of the many reasons why the US currency remains strong.
Historically, it’s also gained in prominence and strength as a forex safe haven thanks to the Bretton Wood agreement that was conducted just before the end of World War II when delegates from 44 Allied countries met and agreed the world’s currencies would no longer be linked to gold but would be pegged to the US dollar. This agreement bolstered the US dollar’s ascendency to throne as the world’s reserve currency.
Today, the dollar remains the world’s reserve currency. According to the International Monetary Fund (IMF) central banks hold more than half (59%) of their reserves in US dollars.
However, the popularity of the US dollar seems to be on a slow decline. The IMF highlights in the same report that central bank reserves have dropped by 12 percentage points from 71% since the euro was launched in 1999.
The IMF adds that central bank share of the euro has fluctuated around 20%, but that other currencies such as the Australian dollar, Canadian dollar and Chinese renminbi have climbed up in popularity. With other currencies gaining a look in from central banks could the Swiss franc muscle into the top spot?
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Last month Capital.com reported how haven demand has flocked to the Swiss franc. Bloomberg also reported how the Swiss franc rose in parity with the euro (EUR/CHF) for the first time since the Russia/Ukraine conflict. Traders began favouring the franc as concerns about global growth intensified.
Bloomberg added that the euro-Swiss franc pair fell as much as 1% to 0.99699 per euro – it’s lowest since 2015. At the time of writing, it’s trading at 0.98734.
The Swiss franc has been strengthened by the SNB unexpectedly joined the hawkish camp and raised its rate rate by 50 basis points in June to -0.25%. It’s the SNB’s first rate increase since 2007, after keeping the rate at -0.75% since 2015.
According to ING analysts, the SNB’s hike decision was made to counter inflationary pressures as inflation in Switzerland hit 2.9% in May, its highest level since the summer of 2008.
The chances are good and there’s lots of speculation to expect another big rate hike, which could boost the value of the franc. After all, rising interest rates make a currency more appealing to foreign investors looking for higher returns.
But not all are convinced that the Swiss franc will overtake the US dollar’s top spot. Walid Koudmani, chief market analyst at financial brokerage XTB told Capital.com: “While we have seen the Swiss franc gain some significant strength lately, it is unlikely it will become the number one safe haven currency as the Fed intends to continue its approach of raising rates to counter inflation which could also sustain the value of the dollar, particularly if we were to see a recession in major economies.
“At the same time, there is some speculation that the SNB will be raising rates in an upcoming September meeting, an event which may shift the balance of global currencies in the short term.”
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