Swiss officials say the Iran war is making them more willing to intervene against any significant appreciation in the country's currency, but doing so risks another dispute with the White House. The Swiss National Bank announced on Thursday that, as expected, it was holding its key interest rate at 0%. But its policymakers said: "Given the conflict in the Middle East, the SNB's willingness to intervene in the foreign exchange market has increased." "The SNB thereby counters a rapid and excessive appreciation of the Swiss franc, which would jeopardize price stability in Switzerland," they added. The Swiss franc, widely considered a safe-haven asset, has been boosted by broader market volatility. Turbulence and uncertainty last year saw the franc rise against the U.S. dollar, and strengthen against regional peers, the euro and the British pound. A strong franc puts deflationary pressure on the Swiss economy, which briefly tipped into disinflation territory last year, and threatens the country's exports. With Switzerland's annual inflation rate at just 0.1%, any rate cut in an attempt to cool the franc would reinstate the unpopular negative rates that ran for seven years until 2022. Alternatively, policymakers can sell Swiss francs and buy foreign currency — typically euros, but sometimes dollars — in efforts to move the price. But, under President Donald Trump, the U.S. has aggressively attacked the SNB's currency intervention strategy. CHF= 1Y line USD/CHF cross rate Last year, the U.S. Treasury Department added nine economies to a "Monitoring List" of trading partners "whose currency practices and macroeconomic policies merit close attention," building on accusations of currency manipulation aimed at Switzerland during Trump's first presidential term. Swiss officials have denied those allegations. The U.S. hit Switzerland with a 39% tariff rate last year, one of the highest imposed on any nation, which the White House attributed to "currency manipulation and trade barriers." The SNB noted in its monetary policy update on Thursday that, although rising energy prices had tilted inflation risks to the upside in the coming quarters, the medium-term inflation outlook remained "virtually unchanged." In a note published Thursday morning, Swiss investment bank UBS said heightened geopolitical tensions were supporting demand for currencies perceived as "safe havens" such as the Swiss franc. Speaking to CNBC's Carolin Roth on Thursday, SNB Chairman Martin Schlegel said the central bank's board wanted to dampen excessive or rapid appreciation of the Swiss franc to ensure price stability in Switzerland. "[We are] looking at monetary policy every quarter, and there we decide on the use of our tools, which is the interest rate and also FX interventions," he said. "And at this meeting, we came to the conclusion that the heightened willingness to intervene in the FX market is what we need for monetary policy right now." Switzerland made a deal with the U.S. to lower its tariff rate to 15% late last year. But, even after the Supreme Court invalidated Trump's tariff regime, the country was once again placed under investigation by the Trump administration, which last week launched a Section 301 probe into 16 trading partners. If the investigations find Switzerland's policies or practices are "unreasonable or discriminatory and burden or restrict U.S. commerce," the United States Trade Representative will have the authority to impose new tariffs or other import restrictions on the country. Asked Thursday whether the rest of the world understood the SNB's motivations for FX intervention were for price stability purposes rather than to win a competitive advantage — a weaker currency makes exports more affordable for foreign buyers — Schlegel reiterated that the SNB "traditionally only intervened at the FX market for monetary policy reasons." "This means to ensure appropriate monetary conditions in Switzerland and not to give an unfair advantage to Swiss exporters, or to prevent adjustments of the of the current account," he told CNBC. Maxime Botteron, an economist at UBS, told CNBC that in highlighting its increased willingness to intervene in the FX market, the SNB had maintained a modest easing bias, despite the rise in energy prices and the associated upside risks to inflation. "We do not know whether the SNB has actually intervened since the beginning of the month, but we believe that chances are high that it has," she said. Botteron added that UBS did not expect the SNB to intervene in the FX market over a prolonged period, however, like it did between 2015 and 2017. "Persistently higher energy prices could raise global recession concerns," she said. "In such a scenario, appreciation pressures on the CHF could become more persistent, and a rate cut by the SNB into negative territory would become more likely, thereby reducing the need for FX interventions." Derek Halpenny, head of research for global markets EMEA at MUFG, told CNBC said the SNB's comments on Thursday signaled the central bank is more willing to turn to FX intervention than negative interest rates. With the euro-franc cross rate breaking below the 0.9 level, he said, the risk of geopolitical turmoil raising the value of the franc and dealing a further deflationary hit to the Swiss economy "is something the SNB will be trying to curtail." Like Botteron, Halpenny said the price action seen since March 16, when the euro dipped below 0.9 francs for a second time, suggests the SNB may have already intervened to counter excessive appreciation. "We doubt U.S. concerns will figure greatly in circumstances of intervening during these volatile periods and any future period where risk-off conditions intensify," Halpenny added, but he noted that the SNB "would likely tread carefully on how often and aggressively it intervenes." "And at some stage if upward pressure was sustained would probably reluctantly turn to negative rates," he said. "But for now, the step, if required (and not already happened) would be carefully chosen bouts of CHF selling intervention."
