When the Swiss franc reached parity with the euro in March, 2022, it was only the beginning of a series of declines. The euro has lingered below parity with the franc since July 5, and the euro-franc exchange rate has been reaching new lows almost every week. The only time the euro fell below current rates is when the Swiss National Bank removed its floor for franc-to-euro exchange rates in 2015.
The euro currently costs just over 97 centimes, up from 96 centimes at the end of August. The main reasons behind this development are likely the general fear of recession, and the energy crisis connected to the conflict in Ukraine. Apparently, the European Union is more strongly affected by these problems than Switzerland is.
Has the franc actually gotten stronger?
The low value of the euro makes the Swiss franc look strong. But in reality, the exchange rate has more to do with a weakening of the euro than with a strengthening of the franc. This is visible when you look at the value of the Swiss franc against the US dollar. At this point in time, 1 US dollar costs around 97 centimes. Half-a-year ago, a dollar cost just 93 centimes. So the dollar has gained against the Swiss franc by around 5 percent over that time frame. The franc may still be the strongest currency in Europe, but in terms of global trade, the franc does not show particular strength.
On the other hand, a comparison with the US dollar reveals just how poorly the euro is performing. Over the past six months, the dollar gained against the euro by nearly 8.5 percent. The euro reached parity with the dollar in July. Currently, the unified currency is closing below parity every day.
Advantages for residents of Switzerland
For consumers in Switzerland, a weak euro is advantageous. Shopping or holidaying in Eurozone countries becomes cheaper when the euro falls – assuming the prices in those countries remain the same. You can find more information in the moneyland.ch guide which explains the effects of a strong Swiss franc.
At the moment, though, the high rates of inflation in the Eurozone dampen most of the advantages for Swiss consumers. In July, 2022, Eurostat reported the annual inflation rate spread across one year at 8.9 percent. Inflation rates for August are likely higher than that.
By comparison, Switzerland’s inflation rate last month sat at 3.5 percent, according to the Federal Statistical Office. That is a higher inflation rate than Switzerland has experienced since the 1990s, but inflation has increased at a much slower pace than it has in the Eurozone. The rising costs in the Eurozone are negating the benefits of the stronger franc for Swiss consumers.
The European Central Bank’s raising of its key interest rate by 0.75 percentage points is an attempt to counter both the weakening of the euro and the massive inflation. The change to the key interest rate is so large, that it is being referred to as a jumbo rate hike. Hopes that the measures will provide some relief are equally high: The ECB predicts inflation rates of only 5.5 percent for 2023, and just 2.3 percent in 2024.
More on this topic:
How the Ukraine conflict impacts finance and investing
