Since the beginning of 2025, the Swiss franc has appreciated by over 10% against the U.S. dollar. At first glance, this may appear to signal economic strength and global confidence. However, for policymakers at the Swiss National Bank (SNB), it is presenting a complex and increasingly urgent challenge.

In May, Switzerland slipped into deflation — a rare scenario in today’s global landscape where many countries, including the U.S., U.K., and Nigeria, are still grappling with persistent inflation. This development highlights the paradox of currency strength and the difficult balancing act central banks must perform in maintaining economic stability.

Understanding the Swiss Franc’s Surge

The Swiss franc is widely regarded as a “safe-haven” currency. During periods of global economic or geopolitical instability, investors tend to move their capital into assets perceived as stable. Switzerland, with its longstanding reputation for political neutrality, low debt, and strong institutions, fits that profile.

This dynamic has intensified in recent months due to renewed fears of a U.S. recession, instability in Chinese markets, and escalating political risk in Europe and the Middle East. Switzerland’s AAA credit rating and historical avoidance of military conflict continue to reinforce investor trust.

The result is increased demand for the franc, especially in light of ongoing market volatility and renewed uncertainty surrounding U.S. political leadership. At the beginning of 2025, the exchange rate stood at approximately 0.91 CHF per USD. As of June, it has appreciated to around 0.82 CHF per USD. This represents a depreciation of the U.S. dollar by about 9.8% against the Swiss franc.

But the franc’s rise isn’t solely due to investor behaviour. The SNB is known for its cautious approach to monetary policy. By keeping interest rates low and intervening in currency markets, the SNB aims to prevent excessive volatility.

The Hidden Risks of a Strong Currency

Contrary to popular belief, a strengthening currency is not inherently positive. Switzerland’s Consumer Price Index fell by 0.1% year-on-year in May, and the price of imported goods dropped by 2.4%. While a reduction in the cost of imports makes consumer goods and energy cheaper, it also depresses domestic prices, leading to deflation.

Deflation is bad for the economy because:

• People delay spending, waiting for prices to fall more.

• Businesses earn less, so they cut jobs or investments.

• The real burden of debt increases because you owe the same amount, but money is worth more.

This is particularly troubling for Switzerland’s export-oriented economy. The country is home to some of the world’s most globally competitive industries, including pharmaceuticals, machinery, and luxury goods. A persistently strong franc makes Swiss products more expensive in foreign markets, eroding export competitiveness and putting downward pressure on growth.

The Swiss National Bank’s Dilemma

Faced with deflation and a currency that continues to appreciate, the SNB is weighing two potential policy responses:

1. Interest Rate Cuts:

   After emerging from an era of negative interest rates in 2022, Switzerland may soon be forced to re-enter it. Analysts at ING forecast two cuts this year, which could bring the policy rate down to -0.25% or below. Negative rates are designed to stimulate borrowing and spending, but they also strain bank profitability and penalise savers.

2. Direct Currency Intervention:

   The SNB could intervene in currency markets by selling francs and buying foreign currencies to artificially weaken the exchange rate. It has done so before, however, such actions are politically sensitive. In 2020, the U.S. Treasury accused Switzerland of currency manipulation, leading to threats of trade sanctions. With the same political leadership now back in Washington, the risk of retaliation is higher than ever.

Wider Lessons

Switzerland’s experience holds lessons far beyond its borders.

• Stronger Isn't Always Better:

  While many economies, including Nigeria, struggle with weak currencies, inflation, and currency volatility, Switzerland shows that excessive strength can be just as dangerous. Currency imbalances at either extreme create distortions that are difficult to manage.

• Currency Moves Need Context:

  Neither appreciation nor depreciation is inherently good or bad. Their effects depend on a country’s export structure, monetary policy flexibility, and external trade exposure.

• Emerging Markets:

  While weaker currencies often dominate headlines, Switzerland's case underscores the importance of managing capital flows, exchange rate expectations, and inflation targets with discipline and foresight. Policymakers in emerging markets should follow this closely.

Looking Ahead

Switzerland’s current predicament is a reminder that in economics, strength and weakness are often two sides of the same coin. A strong currency may reflect global confidence, but it can also erode competitiveness and introduce deflation. The challenge for central banks is not simply to chase strength or fight weakness, but to find a sustainable equilibrium.

At PariVest, we provide our community with deeper insights into global finances. If this kind of analysis resonates with you, follow us for more. For questions, contact us at support@parivest.com.