Switzerland and the United States have issued a joint declaration on foreign exchange policy, with both nations committing not to devalue their currencies for competitive trade advantages. Financial analysts interpret the move as an implicit acknowledgment from Washington of the Swiss National Bank's need to intervene in currency markets to manage the franc's volatility.
The agreement, announced by the Swiss National Bank (SNB) and the U.S. Treasury, comes after years of scrutiny over Switzerland's monetary policy and provides the central bank with greater flexibility to address the franc's strength without risking political friction with the United States.
Key Takeaways
- Switzerland and the U.S. have formally agreed not to manipulate their currencies for competitive purposes.
- The joint statement is widely seen as U.S. approval for the Swiss National Bank (SNB) to intervene in markets to curb excessive franc strength.
- This agreement eases long-standing tensions that saw the U.S. label Switzerland a currency manipulator in 2020.
- The deal provides the SNB with more policy options, potentially reducing the need to implement negative interest rates.
- The Swiss franc has strengthened significantly this year, acting as a safe-haven asset amid global economic uncertainty.
Details of the Joint Declaration
The formal statement released on Monday by the Swiss National Bank and the U.S. Treasury outlines a shared understanding of foreign exchange practices. Both parties pledged to refrain from targeting exchange rates to gain an unfair competitive edge in international trade.
Crucially, the declaration also recognizes that central bank interventions in currency markets can be a legitimate tool. It specifies that such actions are valid for addressing disorderly market conditions or excessive volatility in exchange rates, a clause particularly relevant to Switzerland's economic situation.
"The US is recognising the SNB’s right to intervene. So it could be seen as a green light if they choose to do so again in future," said Lee Hardman, a currency strategist at MUFG, highlighting the significance of the U.S. acknowledgment.
A History of Currency Tensions
The new agreement marks a significant de-escalation in a period of strained monetary relations between the two countries. The Swiss franc's status as a global safe-haven currency means it often appreciates rapidly during times of international market stress.
This strengthening puts pressure on Switzerland's export-oriented economy and can lead to deflationary pressures. In response, the SNB has frequently intervened in markets by selling francs to purchase foreign currencies, thereby aiming to limit its appreciation.
From Watchlist to Agreement
Switzerland's history of intervention led to friction with the United States. In 2020, during President Donald Trump's first term, the U.S. Treasury officially designated Switzerland as a currency manipulator. More recently, in June, Switzerland was placed on a U.S. Treasury watchlist for its currency and economic practices. This new joint statement signals a move toward a more cooperative and understanding relationship on these sensitive issues.
These actions drew criticism from the U.S., which monitors the currency practices of its major trading partners. The new accord effectively provides a framework that allows the SNB to continue its policy mandate without facing immediate political repercussions from Washington.
Economic Pressures on the Swiss Economy
The timing of the agreement is critical for Switzerland. The Swiss franc has experienced a strong surge throughout the year as global investors sought safety amid trade disputes and economic uncertainty. This has driven the U.S. dollar down by 12% against the franc, pushing it below the SFr0.80 level for the first time since the franc's significant appreciation in 2015.
This currency strength, combined with the threat of U.S. tariffs, has created a challenging environment for Swiss policymakers. The Trump administration raised duties on key Swiss exports like watches and cheese to 39% in August, adding further strain to bilateral trade.
Inflation Concerns
A strong franc makes imports cheaper and can push down domestic prices, making it difficult for the SNB to meet its inflation target. Earlier this year, Swiss inflation briefly entered negative territory, hitting -0.1% in May before recovering slightly to 0.2% in August. The new currency agreement provides a tool to combat these deflationary risks.
According to Stefan Gerlach, chief economist at EFG, the easing of tensions between Bern and Washington reduces the political risk if the SNB needs to weaken the franc again. He also noted that it lessens the probability that the central bank will have to resort to pushing its key interest rate further into negative territory to manage the currency's value.
Implications for Swiss Monetary Policy
With this agreement in place, the Swiss National Bank has more room to maneuver. The central bank recently decided to hold its main interest rate steady, but the persistent strength of the franc remained a key concern.
The perceived green light from the U.S. for intervention means the SNB can rely more on direct market actions rather than solely on interest rate policy. This has already influenced market expectations.
Traders have scaled back their bets on the SNB introducing negative interest rates. Derivatives markets now imply a roughly one-in-four chance of such a move, a decrease from previous levels.
A Renewal of Bilateral Relations
The joint statement is viewed by some as more than just a technical agreement on currency. It is seen as a diplomatic effort to stabilize economic relations during a complex period marked by trade disputes.
"I think that this statement — despite being not legally binding and confirming existing practices — can be interpreted as a renewal of bilateral relations and practices in a complicated time," commented Edoardo Beretta, a professor of political economy at the Università della Svizzera italiana.
By clarifying the rules of engagement on currency, both countries have created a more predictable environment for monetary policy and international trade, even as other economic challenges persist.
