(Bloomberg) -- It was supposed to weaken this year, but rising global tensions are shaking analysts’ conviction on the fate of the Swiss franc.

The currency has advanced 3 percent against the euro this quarter, the best performance among Group-of-10 exchange rates. That strength, combined with investors’ haven demand from Italian political worries and global trade spats, have spurred analysts to revise up their forecasts.

The Swiss franc tends to gain in times of market stress, especially when the risks emanate from within Europe. The currency is still seen weakening again to 1.16 per euro by the end of the year from about 1.12 currently, according to the median in a Bloomberg survey of analysts, though this is a far cry from a prediction for 1.20 just three months ago.

“We do not see clear catalyst for the Swiss franc to weaken,” said Lee Hardman, a currency strategist at MUFG Bank Ltd., which sees the franc ending the year at 1.14, compared to his previous prediction for 1.17. “Global trade tensions should keep the franc in demand. The perception of Italian political risks is likely to remain more elevated as well.”

The Swiss currency has appreciated more than 4 percent this year to trade Friday at 1.1240 per euro. Technically, the currency retains a bullish bias, with a euro-franc close below 1.1240 on Friday leading to a target of 1.1157, the 61.6 percent Fibonacci retracement of the pair’s gains since March 2017.

Some strategists see 1.12 as a level that could lead the Swiss National Bank to step in to weaken the franc. Since early 2015, the SNB has used a negative deposit rate plus a pledge to intervene in currency markets if necessary. However David Kohl, who heads Julius Baer Group Ltd.’s currency strategy, thinks the central bank might show some tolerance.

“We had a new set of GDP numbers out of Switzerland which suggest that the economy’s doing quite well despite the strength of the Swiss franc,” he said. While the SNB will continue to manage the currency, the bank may change its view that the franc is overvalued and intervene only at a lower level, he said.

“This could make it a bit more flexible in terms of a stronger currency,” said Kohl, who sees the franc at 1.12 at the end of this year.

The SNB’s foreign-currency reserves fell the most in more than six years in August, dropping 2.5 percent as the franc appreciated against both the dollar and the euro.

Some franc bears are still undeterred by the currency’s recent strength.

“The franc strengthening is temporary and related to the same concerns over trade which is currently supporting the dollar,” says Philip Shaw, chief economist at Investec Bank Plc, whose euro-franc forecast is 1.18 for the end of the year, going up to 1.22 for 2019. “Circumstances will probably result in a reversal of the recent trend.”

Shaw’s stance also results from the prospect of European Central Bank policy normalization. The bank will support the euro by tapering its quantitative easing over the fourth quarter of 2018 and next week’s ECB meeting should put this in focus, he said.

--With assistance from Catherine Bosley.

To contact the reporters on this story: Elizabeth Howcroft in London at ehowcroft@bloomberg.net;Anooja Debnath in London at adebnath@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee

©2018 Bloomberg L.P.

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