The Federal Reserve’s decision to raise interest rates in the United States has been widely hailed as a sign of improving global economic conditions. But Switzerland’s exporters and its central bank will have to wait until they see observable positive impacts, say observers.
US interest rates went up 0.25% on December 16, increasing the target range that banks lend to each other overnight to 0.25%-0.5%. It is the first US rise in lending rates since 2006 and it completed a trio of recent central bank decisions that could impact the Swiss franc.
On December 3, the European Central Bank (ECB) lowered interest rates marginally but opted against printing higher volumes of euros to prop up the eurozone economy. This gave the Swiss National Bank (SNB) enough scope a week later to keep Swiss interests rates on hold.
UBS bank expects the dollar to reach parity with the franc within the next three months as a result of the Federal Reserve’s decision. But UBS foreign exchange specialist Thomas Flury does not expect the dollar rate to move much higher than parity against the franc for the next 12 months.
Furthermore, UBS does not expect the euro to strengthen a great deal against the franc, rising to CHF1.10 by the end of next year from its current level of CHF1.08. This is because the Federal Reserve appears determined to move so cautiously that it deliberately avoids sending shock waves through global markets with its monetary policy.
Caught in crossfire
But Flury does predict that the gradually strengthening dollar could persuade the ECB to ease up on its programme of flooding the markets with euros – a policy that has been largely blamed for the SNB abandoning its defence of the franc-euro exchange rate peg in January.
“The Federal Reserve announcement could put pressure on the ECB to stop quantitative easing earlier than planned,” Flury told swissinfo.ch. Flury’s reasoning is that US economic recovery should help restore a healthier glow to Europe. At the same time, higher interest rates will attract more investment to the dollar, thus strengthening the greenback.
The SNB will also be hoping that the US interest rate rise will gradually close the gap between the divergent monetary policies of the US and Europe. SNB chairman Thomas Jordan recently warned of the problems created when Europe is cutting rates and printing money while the US is doing the opposite.
Such divergence “presents small open economies like Switzerland, in particular, with huge challenges as they typically trigger substantial exchange rate fluctuations and hamper economic growth. Switzerland’s economy is thus going through a difficult phase,” Jordan said on December 10.
The only potential downside of the Federal Reserve’s policy was sounded by the State Secretariat for Economic Affairs (Seco). Swiss government economists hope that the US recovery and strengthening currency do not encourage investors to move money out of hard-pressed developing economies like Brazil or South Africa.
“In view of their fragile condition, key emerging economies might be affected by considerable turmoil and capital outflows as soon as interest rates in the US begin to increase,” Seco wrote on December 17. Such a development might harm Swiss exporters that do business with developing economies, Seco fears.
Headwinds and tailwinds
Even a slow, gradual strengthening of the dollar would be good news for the Swiss economy, according to Yngve Abrahamsen, an economist at Zurich’s KOF Swiss Economic Institute. “The increase in the value of the dollar could be expected to take some of the pressure off the Swiss franc as a safe haven.”
As a result, Swiss exports would lose their current competitive price disadvantage, while Switzerland would become a less expensive destination for tourists. This, however, will take some time.
Swiss company Burckhardt Compression, which does a large portion of its business in the US, told swissinfo.ch that it did not expect the latest US interest rate rise to have any significant impact on its business, particularly because the move had been so widely expected.
This view was largely echoed by the Swissmem lobby group for electrical engineering, machine building and fine tools firms. "It is a step towards normality and our members hope it will lead to the dollar strengthening against the franc," said spokesman Ivo Zimmermann.
"But it cannot compensate for the disadvantages we face in the European market with currency exchange rates."
But Swiss business with the US is nevertheless set to continue on its positive path, according to Martin Naville, chief executive of the Swiss-American Chamber of Commerce. “The interest rate rise has heightened positive sentiment and is a good sign that the US economy is in good shape,” he told swissinfo.ch.
“We have to remind ourselves that Swiss exports have been increasing at a compound rate of 6.5% for the last 20 years despite the recent headwind of unfavourable exchange rates. With the tailwind of a strengthening dollar, Swiss exports should continue to develop positively.”