Summer vacations could be slightly more expensive than expected in 2024
Published: Wednesday, Mar 27th 2024, 17:30
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Mr. and Mrs. Swiss may have to dig deeper into their pockets for their summer vacations this year than previously assumed. This is because the Swiss franc, which for a long time only knew the upward direction, has been weakening against both the euro and the US dollar since the beginning of the year. And there are no signs of a trend reversal.
At midday on Wednesday, the euro was trading at 0.9823 francs, its highest level for almost a year. The dollar is also flexing its muscles: It is currently trading at 0.9067 francs - its highest value since November 2023. The franc has thus lost more than five percent against the euro since the start of the year and over seven percent against the dollar.
In 2023, it was the other way around. At that time, the franc gained a good six percent against the single currency and almost nine percent against the dollar. The euro even hit a record low of 0.9267 francs at the start of the year. 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, according to Raiffeisen.
SNB interest rate cut a burden
The trigger for the current weakness is the Swiss National Bank (SNB). Last week, it unexpectedly lowered its key interest rate by 0.25 percentage points to 1.50 percent. This led to capital flowing out of the Swiss franc into other currencies with higher interest rates, as investments in other currencies yield better than in Swiss francs when interest rates are lower.
A weak franc weakens purchasing power, as it makes goods from and abroad more expensive. As a result, it is now less worthwhile to shop across national borders, for example, and vacations abroad become more expensive. On the other hand, the domestic economy benefits. This is because the numerous export-oriented Swiss companies will become more competitive internationally because their products will be cheaper.
Limited weakness
The weakness of the franc had already begun in December, said Thomas Stucki, Chief Strategist at St. Galler Kantonalbank. At that time, the SNB had signaled that it would refrain from further sales of foreign currencies against the franc. "This was interpreted as a signal that the SNB wanted to actively weaken the franc," said Stucki. The interest rate cut reinforced this assessment once again.
However, the weakness of the franc is limited, according to Thomas Flury, foreign exchange expert at UBS. In his opinion, the euro-franc currency pair could well reach parity. But the air is thin above that. This is because the eurozone is still burdened by the war in Ukraine and very weak growth. Selling pressure on the dollar is also likely to slowly increase above 92 centimes. "In the medium term, we see the dollar in the CHF 0.85 to 0.90 range," says Flury.
The current levels are likely to hold for a while yet, says Thomas Heller, CIO of Frankfurter Bankgesellschaft. When the interest rate cuts by the Fed and the ECB become more concrete, in June or July at the latest, the burden on the Swiss franc due to the greater interest rate differential will increasingly disappear. "That should also be the end of the line for the euro and the dollar against the franc."
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