“Switzerland flag”
Image extraction: DALL・E2
Safe Currency:
“A safe currency is one that maintains or increases in value when market instability or economic uncertainty rises.”
(Source: dailyfx.com)
dailyfx.com continues to explain that it “will function as a ‘haven’ trusted for its economic condition and political stability, and for protecting assets.”
The Japanese yen was once also called a “safe currency.” As of 2024, the Swiss franc and the US dollar are considered such. The Swiss franc (CHF) in particular is synonymous with the term safe currency.
It would have been the number one legal currency to have switched to before the ongoing trend of yen depreciation began.
It’s too late for regrets now, but as a modest measure to avoid making the same mistake in the future, it’s worth learning a little about the Swiss franc.
Conditions for a Safe Currency
Reasons the Swiss franc is considered safe include Switzerland’s strong economy, its unlikely involvement in wars, and its low risk of being invaded. But what exactly qualifies a currency as a “safe currency”?
According to this Reuters article (https://jp.reuters.com/article/idUSKBN2Z502Q/ *in Japanese),
・Current account balances
・Net foreign assets
are important.
The question then is why Japan, which maintains a current account surplus and is among the countries with the largest net foreign assets in the world, has slipped from this position. The worsening of the current account surplus as a percentage of GDP (Gross Domestic Product) is cited as the cause.
Japan’s current account balance as a percentage of GDP went from 3.9% in 2021 to 2.1% in 2022. Switzerland’s went from 7.9% in 2021 to 9.8% in 2022. While Japan’s has halved, Switzerland’s has increased.
This means that either economic national power is waning or, conversely, increasing.
The deterioration of Japan’s current account balance is attributed to an expanding trade deficit. The trade deficit is influenced by the weakening yen, as explained in the article.
The idea that a currency is safe because it comes from a rich and stable country is backed up by this general impression.
Moreover, Switzerland’s policy interest rate is 1.5%. The explanation of the strength of the franc over the dollar, which has an interest rate of about 5.25~5.5%, does not include the interest rate difference.
Personal Experience
I visited Switzerland in 2013 and 2017 with the purpose of traveling while visiting friends.
Looking back now, compared to prices in Japan, it felt slightly expensive 10 years ago, and about double 7 years ago. I haven’t been recently, so this is not from personal experience, but I imagine that as of 2024, it would feel like 3 to 4 times more expensive.
The difference between Japan and Switzerland is whether they are keeping up with the world economy or being left behind. Actually, in terms of prices, it could be said that Switzerland is leading.
A Swiss friend working in Basel said he didn’t want to work in Germany, the UK, or France because the wages are too low.
Switzerland’s economic power looks down on other advanced nations… truly formidable, and that left a strong impression on me.
Swiss Franc Shock
Adding another personal story, the Swiss franc shock on January 15, 2015, was practically the first major shock for me, who started FX trading in 2013.
At that time, my trading was mainly short time frame scalping, and the massive volatility that occurred was beyond surprising.
That day, I was selecting some currency pairs that looked tradable on MT4, and EURCHF was one of them.
I was timing a short position and deeply regretted missing a once-in-a-lifetime opportunity.
At the same time, it was also the moment I truly understood the dangers of FX trading.
There was a real possibility that I could have been long on the EUR, and if so, I would have been wiped out instantly.
Three key lessons for trading are: always set a stop-loss, only open accounts with brokers that offer a zero balance cut system, and ensure that the broker has custodial safeguards.
These three points are essential for trading in FX and are not something you can claim ignorance about… that’s what the Swiss Franc shock hammered home for me.
Anyway, I can only be grateful that I did not suffer losses from such a huge shock, rather than regret missing out on huge profits.
History of the Swiss Franc as a Safe Currency
When looking into the history of the Swiss franc, it becomes clear that it has been regarded as a safe currency for over 100 years.
During World War I starting in 1914, and again during World War II starting in 1939, the Swiss franc apparently maintained its stability.
In 1971, during the Nixon Shock (when the U.S. dollar’s convertibility to gold was suspended), the Swiss franc maintained the gold standard and firmly established its status as a “safe currency.”
Even after the gold standard was completely abandoned in 1973, causing instability in the foreign exchange market, an investment boom in the Swiss franc occurred at the end of January when it exited the fixed exchange rate system.
In more recent times, such as during the Lehman Shock and the COVID-19 shock, the Swiss franc was a sought-after currency.
By the way, the franc was introduced in Switzerland in 1848.
(Reference: swissinfo.ch)
As a safe currency, the Swiss franc has impressively weathered severe storms. It feels like it cannot relinquish its status to newly emerged currencies like the Japanese yen, given the impressive track record.
With this currency, even if a third world war or another financial crisis were to occur, it seems reliable enough to be trusted.
That’s why the wealthy probably prefer to keep their financial accounts in Switzerland.
The Future of the Japanese Yen
I understand that it’s not simple, but it would be nice if Japan could become a permanently neutral country like Switzerland, Austria, or Turkmenistan.
Since it would not be involved in other countries’ wars, it wouldn’t be feasible to remain unarmed; serious self-defense measures would become necessary.
This could mean having to arm seriously under the guise of self-defense, and possibly reintroducing conscription as seen in Switzerland, Austria, or Turkmenistan.
This isn’t about whether it’s good or bad; it’s just what can be inferred simply from other countries’ experiences.
However, it’s clear that it’s impossible to achieve the level of trust that the Swiss franc enjoys from the international community with a currency dependent on military alliances with other countries.
Of course, the value of a currency isn’t determined solely by this. Many complex factors intertwine to drive exchange rates.
But when considering a currency primarily for safety and reliability, the independence of the nation seems essential.
Just as a person who has established their own household is generally more trusted than someone living with their parents.
The important thing isn’t necessarily how it actually is, but how it appears at first glance.
In any case, to earn unwavering trust, it’s necessary to prove its worth over a long history, and thus, the Swiss franc undeniably runs ahead of the Japanese yen.
…including such considerations, I personally think that the yen will continue to weaken against major currencies in the long run.
Even if there are short phases of a stronger yen in the coming years, I’m speaking in terms of a longer span.
The World’s Strongest Currency
As an aside, while the Swiss franc might be thought of as the strongest currency against the U.S. dollar, which is the reserve currency, it turns out that the Kuwaiti dinar (KWD) is actually stronger. The currency of Kuwait, the dinar, is known for it.
1 KWD = 3.26 USD (*as of April 2024)
All I know about Kuwait is the 1990 Iraqi invasion, but according to Google, Kuwait is known for its immense wealth, stable economic foundation, low unemployment rate, and being a tax-free country.
Interestingly, the Swiss franc ranked seventh, the euro eighth, and the British pound fifth.
This was surprising.
The weakest was the Zimbabwean dollar, which is now completely worthless as a currency. In 1980, the exchange rate was 1.00 U.S. dollar = 0.68 Zimbabwean dollars.
Still, I wouldn’t consider holding KWD; it’s a minor currency unfamiliar to me.
