You probably have heard of the popularity of Swiss bank accounts as offshore savings accounts for investors. Switzerland is well-known for being a neutral territory. It’s the global destination of choice for investors looking to keep capital outside of their own countries, and relies heavily on the banking sector to support its economy. Likewise, Switzerland’s neutrality plays a large part in its currency value.
1. The Swiss franc is considered a safe haven currency
The Swiss franc tends to appreciate during times of economic and political instability, earning its status as a “safe haven” currency. In times of uncertainty, the franc also provides a stable alternative to the euro, dollar or British pound. In 2011, the Swiss National Bank, the central bank behind the Swiss franc, began an active policy in the currency market to cut interest rates and prevent overinflation of the franc.
2. The Swiss National Bank controls their inflation rate
The Swiss National Bank targets a consistent inflation rate of around 2%. Additionally, if the economy takes a downturn, the bank does not typically create monetary policies with the intention of stimulation. This fits in with the long-term reputation of Switzerland for conservative economic policies.
3. Switzerland maintains independence and neutrality
While Switzerland often chooses to follow similar policies of other European countries, it still maintains a clear independence. In many ways, the Swiss franc is impervious to economic conditions; unlike other currencies, such as the American dollar.
Sometimes it appears the only influence on the Swiss franc that really matters are the influence rate decisions given by the Swiss National Bank. This may be in part because the Swiss governments are fairly consistent regarding their economic policies. Or because the Swiss franc’s position as a stable, liquid and reliable currency makes it a popular choice for traders.
4. The Swiss franc is traded at a high volume
Switzerland’s franc plays an unusually weighty place in the foreign currency exchanges. Of the top eight currencies traded globally in the Forex market, the Swiss franc is ranked sixth — despite the fact that in nominal GDP, Switzerland’s economy ranks 19th in the world.
5. Financial services play an key role in Switzerland’s GDP
Due to its rules involving secrecy and neutrality in banking, financial services make up 11% of Switzerland’s GPD. This gives Switzerland an incentive to comply with certain international policies to maintain its status as a desirable location for offshore accounts.
6. The franc is widely used by “carry traders”
The Swiss franc is a popular choice for trading in the foreign exchange market, and is most often traded against the euro, U.S. dollar, British pound and Japanese yen. Because of the francs low interest rate, it is a popular choice for “carry trading,” where speculators borrow Swiss francs to invest in high-yield currencies like the euro.
As Switzerland is unlikely to abandon its policy of low-debt fiscal policies, and remain a popular center for global banking, the franc holds a firm place in the foreign currency exchange market. The Swiss franc is likely to remain a top choice for carry traders and other currency trades worldwide.