Foreign currency reserves reach new high

The Swiss National Bank has spent billions defending the euro exchange rate Keystone

Switzerland's foreign currency reserves have grown by more than a quarter over the past month, reaching a record level as its central bank tries to counter demand for the Swiss franc.

The Swiss National Bank (SNB) said on Thursday it had SFr303.8 billion ($318.05 billion) worth of foreign currency in its vaults at the end of May. This is a 28 per cent increase from the SFr237.6 billion reserves it had in April.

SNB spokeswoman Silvia Oppliger said the increase was largely related to the central’s bank’s purchase of foreign currency to maintain the minimum exchange rate to the euro.

The SNB has previously declined to specify how much it was spending to ensure the euro doesn’t fall under SFr1.20, a level it set in September after fierce lobbying from Swiss companies struggling to export to neighbouring eurozone countries.

The SFr66.2 billion increase in reserves is the biggest since the minimum exchange rate was introduced. The total breaks the previous record set last September.

Thomas Flury, a currency specialist at UBS, one Switzerland’s two major banks, reckons the SNB purchased SFr60 billion in foreign currencies in May, with the rest of the increase coming from fluctuations of the value of those currencies.

The US dollar gained seven per cent, the Japanese yen ten per cent and the Canadian dollar two per cent. The most recent national bank data published in March showed that half the foreign currency reserves were euros, while the greenback accounted for 28 per cent, the yen nine per cent, the British pound five per cent and Canadian dollars four per cent.

The worsening euro crisis has led to speculation among observers in recent weeks that the national bank has been more aggressive in defending the euro exchange rate. Money market specialists estimate that the SNB‘s interventions in May were worth between SFr20 billion and SFr100 billion.

Under fire

The central bank’s policy has come under fire recently.

Former UBS and Credit Suisse CEO Oswald Grübel said in the “Sonntag” newspaper the SNB was exposing the Swiss economy to major risks, stating that it was only a matter of time and the development of the euro crisis before the minimum exchange rate was dumped.

Experts have also questioned how long the central bank can keep propping up the euro without being accused of manipulating its currency. Another risk is a sudden surge in the franc when the euro floor is lifted.

Swiss commentators have revived the idea of a sovereign wealth fund for Switzerland, to ensure the SNB’s reserves are invested in solid assets rather than stoking inflation.

“The current very high uncertainty and the subsequent run for safe havens is likely to trigger further interventions,” said UniCredit analyst Alexander Koch. To illustrate how strong investor demand for the franc is, he cited a recent successful sale of Swiss government debt with a negative interest rate of -0.75 per cent over three months.

The SNB has defended its position, stating that it will continue defending the minimum exchange rate and keep on buying foreign currency. A government task force is also reviewing other measures to keep the franc safe, such as capital controls, especially if member states such as Greece decide to leave the euro zone.

Safe haven

The Swiss franc is a so-called “safe haven” currency, which means that investors and speculators buy it when other currencies, including the euro and the dollar, are under pressure.  

A safe haven currency is backed by a robust economy, a stable political framework and enough liquidity to deal with strong bouts of international trading.

Neutral Switzerland, with its conservative economic policy and a strong financial sector, has been a classic safe haven for many years, especially during the two world wars.

The Swiss National Bank has emphasised that it does not pursue an exchange rate target, but consistently bases its monetary policy on its legal mandate. 

This mandate stipulates that “the SNB is required to ensure price stability, while taking due account of economic developments”. 

Starting in March 2009 the SNB intervened in currency markets. But after pumping in 15 per cent of GDP in May 2010 to little effect as the Swiss franc surged during the first round of the Greek debt crisis, it dropped the plan June 2010. 

These forays led it to a loss of SFr21 billion in 2010, its biggest ever, and its then chairman, Philipp Hildebrand, faced calls to resign.

Facing intense pressure from politicians and the export community, the SNB further intervened in the markets in 2011 before announcing a floor exchange rate of SFr1.20 against the euro in September of that year.  

Since then, the franc has hovered above that mark thanks to the SNB’s pledge to buy unlimited amounts of foreign reserves.

The central bank shelled out SFr17.8 billion supporting the franc in 2011 but still turned in an annual profit for the year.