The Swiss National Bank (SNB) has significantly altered its foreign currency strategy, prioritizing the euro over the U.S. dollar in its recent interventions. According to its latest quarterly report, the central bank purchased 5.06 billion Swiss francs ($6.36 billion) in foreign currency during the second quarter, with nearly all of the funds used to acquire euros.
This move marks a notable departure from previous patterns and comes amid heightened trade tensions with the United States. As a result, the euro's share of Switzerland's massive $1.1 trillion foreign reserve portfolio has now surpassed that of the dollar for the first time since 2020, signaling a potential long-term shift with broad implications for global currency markets.
Key Takeaways
- The Swiss National Bank bought 5.06 billion francs worth of foreign currency in Q2, its largest intervention in over three years.
- The intervention focused almost exclusively on purchasing euros, not U.S. dollars.
- The euro now constitutes 39% of SNB's reserves, while the dollar's share has fallen to 37%.
- This strategic shift is influenced by U.S. trade pressure and accusations of currency manipulation.
- The move could influence how other central banks manage their nearly $13 trillion in collective reserves.
SNB's Record Intervention and Currency Rebalancing
The Swiss National Bank has long contended with a strong Swiss franc, a currency often sought as a safe haven by investors during times of global uncertainty. A powerful franc can lead to deflationary pressures within Switzerland by making imports cheaper and exports more expensive. To counter this, the SNB frequently intervenes in foreign exchange markets by selling francs and buying other currencies.
In the second quarter of the year, this intervention reached its highest level in more than three years. The SNB's balance sheet revealed purchases of 5.06 billion Swiss francs in foreign currency. What stood out, however, was the composition of these purchases.
Analysis of the central bank's reserve data shows a clear pivot towards the euro. This strategic choice has rebalanced the SNB's holdings, with the euro's share rising to 39% and the U.S. dollar's share declining to 37%. This is the first time the euro has held a larger position than the dollar in Switzerland's reserves since 2020.
Why the SNB Intervenes
The Swiss franc is considered a 'safe-haven' currency. During global economic or political stress, investors often buy francs, driving up its value. An overly strong franc hurts Switzerland's export-reliant economy and can push the country into deflation. The SNB intervenes by selling francs to weaken its value and maintain price stability, which is its primary mandate.
The market behavior reflects this intervention. While the franc strengthened against both the dollar and the euro in April, its trajectory since has diverged. The EUR/CHF exchange rate has remained stable around the 0.93 mark, suggesting consistent SNB activity. In contrast, the USD/CHF rate has continued to decline, indicating a hands-off approach to the dollar.
"This sharp re-allocation signals that the SNB focused its efforts on preventing euro/franc depreciation," noted Olivier Korber, a strategist at Societe Generale, in a recent analysis.
Trade Tensions with the United States Drive Strategy
The decision to avoid purchasing U.S. dollars appears to be a direct response to ongoing and tense trade negotiations with Washington. The U.S. has previously accused Switzerland of manipulating its currency to gain an unfair trade advantage. These concerns have intensified under the current administration, which has made weakening the dollar a broader policy goal.
In August, Washington imposed a significant 39% tariff on certain Swiss goods, escalating the economic pressure. By purchasing large quantities of U.S. dollars, the SNB would risk fueling accusations that it is intentionally weakening the franc against the dollar to benefit its exporters.
This sensitivity was highlighted by an unusual joint statement from the SNB, the Swiss Finance Ministry, and the U.S. Treasury. The statement affirmed that Switzerland does not target its exchange rate for competitive purposes and that its interventions are a necessary tool for ensuring price stability.
Global Central Bank Reserves
According to the International Monetary Fund (IMF), central banks around the world hold nearly $13 trillion in foreign currency reserves. The U.S. dollar remains the dominant reserve currency, accounting for approximately 56% of this total.
Analysts interpret the joint statement as a delicate compromise. While it gives the SNB official cover to continue its monetary policy, it also underscores the political risks of intervening in the dollar market. Consequently, many experts believe the SNB will continue to concentrate its efforts on the euro.
"This implies that future SNB FX interventions will likely concentrate on the euro, leaving dollar/franc to be more freely market-driven," Korber added.
Broader Implications for Global Markets
While the SNB's actions are specific to Switzerland's circumstances, they could have wider ripple effects. The move demonstrates how assertive U.S. trade policy can directly influence the reserve management strategies of other sovereign nations. If other central banks feel similar pressure, it could gradually erode the U.S. dollar's dominance as the world's primary reserve currency.
A shift in currency holdings is not just a line item on a balance sheet; it necessitates a reallocation of underlying assets. The SNB's vast reserves are invested in a diverse portfolio, including government bonds and equities.
Asset Allocation Shift
The SNB's portfolio is heavily invested in foreign assets:
- Approximately two-thirds are held in government bonds.
- Around 25% are invested in global equities, including a significant portion in U.S. technology megacaps.
Reducing the U.S. dollar's share of reserves logically requires divesting from U.S. dollar-denominated assets, such as U.S. Treasuries and American stocks, and increasing holdings of euro-denominated assets, like German bunds or French equities. While the SNB's actions alone may not move global markets, a broader trend among central banks could create significant capital flows between regions.
The situation is further complicated by targeted U.S. policies, such as the announcement of 100% tariffs on certain pharmaceutical imports unless companies build manufacturing facilities in the U.S. This directly affects Swiss pharmaceutical giants like Roche and Novartis, adding another layer of complexity to the trade relationship and giving the SNB further reason to avoid aggravating Washington with dollar interventions.
Ultimately, the Swiss National Bank's pivot to the euro is a clear signal of the changing dynamics in global finance, where monetary policy decisions are increasingly intertwined with geopolitical and trade pressures.
