When looking for hard currencies today, one almost inevitably ends up in the franc. All major currencies have lost value against the Swiss franc in this millennium. The euro almost forty percent, the dollar 44 percent and the yen even 60 percent. Why?
There are many reasons for the strength of the franc. On the one hand, Switzerland has an extraordinarily high economic power with mostly large current account surpluses, which boosts the demand for francs. In this millennium, Switzerland’s current account surplus was at least five percent of gross domestic product (GDP) in 20 out of 23 years.
However, a positive current account alone does not make a hard currency, as the example of Norway shows. Because the Scandinavian country has even stronger current account data. Since 2000, the average surplus has been 12 percent of GDP. At the same time, the Norwegian krone depreciated by around 30 percent against the euro in the same period. So what is behind the strength of the franc?
Safe haven
Julian Marx, Research Analyst at Flossbach von Storch (Image: FvS)
Probably above all the status of the franc as a “safe haven”, explains Julian Marx (picture above), Research Analyst at the Cologne asset manager Flossbach by Storkwho too in Zurich is represented. The franc has been characterized by monetary and political stability since the 1920s, while in numerous other currency areas the de facto function of a metallic currency system was regularly used for state financing.
This reputation, acquired over decades, still reverberates today. Investors’ desire for (currency) stability was expressed not least in the foreign exchange investments of the Swiss National Bank (SNB).
Real hard currency
By the first quarter of 2022, the SNB had acquired foreign currency equivalent to more than CHF 900 billion in order to mitigate the upward pressure on the domestic currency.
Since then, interest rates abroad have risen more sharply than in Switzerland, and the SNB has again reduced its foreign exchange holdings by more than CHF 100 billion.
Huge Depreciation against the Swiss franc
(Source: FvS, click on graphic to enlarge)
“As long as Switzerland as a business location can maintain its high level of productivity and the status of the Swiss franc as a “safe haven”, the Swiss national currency will probably remain a real hard currency for many years to come,” explains Marx.
Euro, dollar and yen: individual construction sites
But what about the large currency areas of the industrialized nations? Can they still be called hard currencies? “A clear judgment is difficult,” says Marx, “because the euro, dollar and yen all have individual construction sites.”
The Eurozone lives with the innate design flaw of the economic heterogeneity of the member states. As the world reserve currency, the dollar enjoys the status of a “safe haven”. However, in an increasingly polarized world, such status is not set in stone.
Looking for alternatives
In this respect, a chronic current account deficit, such as that in the USA, should by no means be ignored. After all, the US economy has not been able to generate a current account surplus for 30 years, which, viewed in isolation, should speak against a structural appreciation of the dollar.
Basically, there is no large currency area that can convince across the board. Finding alternatives is also difficult. The Chinese renminbi is not intruding, even though China’s economic performance and the attractiveness of the sales market are undisputed.
What is the renminbi still worth?
But there, every investment depends on the will of an autocratic leadership. In view of the experience of deteriorating legal certainty in recent years, the country will find it increasingly difficult to establish the renminbi (also in the western world) as an alternative key currency to the dollar.
“At the end of the day we are still talking about three very powerful currency areas when it comes to the euro, the dollar and the yen,” says Marx. With only ten percent of the world‘s population, they generated almost 44 percent of global economic output last year. At the same time, their currencies are still extremely liquid due to the size of the economy and usage patterns.
“Hard soft currency”
This is particularly true for the euro and dollar. Around 60 percent of global foreign debt was listed in dollars at the end of 2021, around 20 percent in euros. A look at foreign exchange reserves and international payment transactions also shows a leading use of the two currencies.
With regard to the euro, it is therefore true that it cannot be a hard currency in the sense of a D-Mark simply because of its design flaws. Perhaps, due to a lack of significantly better alternatives, it is nevertheless something like a “hard soft currency”.