Dollar decline adds to headache for Swiss central bank

ZURICH: The Swiss franc rose to a five-year high on Monday against a fast-falling dollar, creating a headache for the Swiss National Bank as it battles to keep a lid on its currency.

The dollar-franc exchange rate fell to 0.8989, its lowest level since January 2015 -- just after the SNB scrapped a currency peg to the euro -- as investors fled the US dollar after Joe Biden was declared the winner of the American presidential election.

The rise may lead the SNB to ramp up currency interventions to check the rise of the franc, whose appreciation hampers Switzerland's export-reliant economy.

"It is definitely more a case of the dollar weakening rather than the franc rising. We still think the dollar is over-valued at the moment, and can see it at around 0.89 vs the franc in 12 months time," said Elias Hafner, a currency strategist at Zuercher Kantonalbank.

He noted Biden's victory was expected to bring about a more stable presence in the White House, which was encouraging investors to leave the dollar in favour of riskier assets.

The US Federal Reserve last week said it remained committed to near-zero interest rates. Its recent pivot towards tolerating above-target inflation has lessened the dollar's attractiveness.

UBS expects the dollar to weaken further, forecasting 1.15 to 1.20 euros to the dollar for the rest of 2020, and 1.20 to 1.25 euros in 2021. The bank also expects the dollar to weaken more against the Swiss franc.

"The dollar-franc level of 0.9 is being tested at the moment, and that will be lower next year," said Thomas Flury, head of currency at UBS Wealth Management. "We expect it will drift to 0.88 eventually."nAPN035CDN

Flury expects SNB Chairman Thomas Jordan to respond with increased currency interventions.

Data on Monday showed SNB sight deposits - a proxy for its interventions - rising by 22 million francs last week, far below the 3 billion to 6 billion franc weekly level seen earlier this year.

The SNB declined to comment on its interventions. Analysts reckon it will not be deterred by fears of being labelled a currency manipulator in an upcoming US Treasury report.

"The SNB already accepted the risk of being called a currency manipulator when it stepped up its interventions earlier this year," said ZKB's Hafner.