Franc loses value: summer holidays in 2024 could be more expensive than expected

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Mr. and Mrs. Schweizer will probably have to dig deeper into their pockets for their summer holidays this year than previously expected. The Swiss franc, which has long known only an upward direction, has been weakening against both the euro and the US dollar since the beginning of the year. And there are no signs that the trend will reverse.

At 0.9823 francs on Wednesday afternoon, the euro was more expensive than it had been in almost a year. The dollar is also showing its strength: it is currently trading at 0.9067 francs – the highest value since November 2023. The franc has lost more than five percent of its value against the euro and more than seven percent against the dollar since the beginning of the year.

In 2023, the situation was the opposite. In that period, the franc gained six percent against the common currency and almost nine percent against the dollar. The euro fell to a record low of 0.9267 francs at the beginning of the year. According to Raiffeisen, at that time, speculation about rapid interest rate cuts by the US Federal Reserve and the European Central Bank (ECB) caused the franc to strengthen.

SNB cuts interest rate – Swiss franc weakens

The driver of the current weakness is the Swiss National Bank (SNB). Last week they unexpectedly cut key interest rates by 0.25 percentage points to 1.50 percent. This caused capital to flow from the franc into other currencies with higher interest rates; because when interest rates are lower, investments in other currencies provide better returns than the franc.

A weak franc weakens purchasing power because it makes goods from home and abroad more expensive. This means shopping across national borders is now less valuable and holidays abroad are also becoming more expensive. On the other hand, the domestic economy also benefits from this. Many export-oriented Swiss companies are becoming more competitive internationally as their products become cheaper.

St. Thomas Stucki, chief strategist at Kantonalbank of Wales, said the weakness in the franc started in December. At that time, the SNB signaled that it would refrain from selling foreign currencies in exchange for Swiss francs. “This was interpreted as a signal that the SNB wanted to actively weaken the franc,” Stucki said. The interest rate cut once again strengthened this assessment.

Ukraine war puts pressure on euro zone

But the franc’s weakness is limited, according to UBS currency expert Thomas Flury. According to him, the euro-franc currency pair can easily reach parity. But the mood is thin on this issue. The Eurozone is still bearing the brunt of the war in Ukraine and very weak growth. The selling pressure on the dollar is also likely to gradually rise above 92 cents. “In the medium term, we see the dollar in the range of 0.85 to 0.90 francs,” says Flury.

Frankfurter Bankgesellschaft CIO Thomas Heller says today’s levels will likely remain stable for some time. If the interest rate cuts of the Fed and the ECB materialize in June or July at the latest, the burden of the increase in the interest rate difference on the franc will gradually disappear. “This should also be the end of the road for the euro and the dollar against the franc.” (SDA/AWP/rule)

Source :Blick