In December 2020, half a year into the pandemic, the Swiss National Bank (SNB) received a call from the US Treasury Department. For years, the US had accused Switzerland of monetarily steering the franc (CHF) to create “unfair” advantages that harmed its international trading partners. Swiss officials were informed that they had officially been declared a “currency manipulator.” The reason: SNB had gone too far dampening the appreciation of the franc to keep inflation down.

The US dollar appreciated substantially during the pandemic, as individuals, corporations, and governments all over the world flocked to it as a safe haven. The Swiss franc did as well.

USD to purchase 1 CHF, with currency manipulator watchlist period: Dec 2020 – June 2023

The surge in demand led to a sharp increase in the franc’s value against other currencies, including the dollar, as shown above (inverted). The exchange rate rose sharply in this period, from around $1 at the start of 2019 to a peak of $1.14 in December 2020 — despite the fact that at the same time, the Swiss National Bank (SNB) was exchanging francs for over $98 billion worth of foreign assets to prevent the appreciation of the domestic currency. That was right before the US Treasury called.

The “Currency Manipulation” Designation

Twice a year, the US Treasury releases the “Macroeconomic and Foreign Exchange Policies of Major Trading Partners” report, analyzing trends in exchange rates, monetary policy, and the balance of payments among major US trading partners. 

When deciding whether to slap the “currency manipulator” label on a foreign nation, the Treasury Department first considers whether the country has:

• A bilateral trade surplus of at least $15 billion with the US
• Foreign currency interventions higher than 2 percent of its GDP
• Material current account surplus exceeding 3 percent of GDP

Because Switzerland breached all 3 of these criterias, the US Treasury classified it as a currency manipulator.

According to the December 2020 edition of the Treasury report, Switzerland had been running an “extremely large current account surplus,” and the bilateral trade deficit had “widened notably over the last year reaching $49 billion over the four quarters through June 2020.” Further, the Treasury pointed out that SNB had purchased $103 billion — 14 percent of Swiss GDP — of foreign assets to prevent exchange-rate appreciation between July 2019 and June 2020. Of that, $93 billion was disbursed in the first half of 2020 alone.

The Treasury’s demand: let the franc’s exchange rate run its course, accept inflation domestically, and contend with the gains and losses of exchange rate fluctuations. The report castigated what it characterizes as Switzerland’s “reliance on unconventional monetary policy” to support its price levels.

Unique Circumstances

Switzerland among the few countries on its continent that does not use the Euro. Switzerland’s population of only 8 million people makes the franc the 84th most-used currency in the world — compared to 350 million people using the Euro. Why is the franc, backed by such a tiny user base and economy, trusted by so many?