“The U.S. dollar and the Swiss franc could be considered safe havens," said Swiss National Bank President Thomas Jordan in an interview with a local newspaper last month.

Conspicuously missing in the Swiss central banker’s comment was the yen. The Japanese currency, which, along with the U.S. dollar and Swiss franc, had long been considered a safe-haven currency — where investors seeking to reduce risk and avoid financial losses parked their assets, especially during times of economic and financial instability like now.

The yen lost its safe-haven status after it continued its downward slide since March this year, to the point that the Japanese Finance Ministry intervened twice when the currency reached around ¥145 in September and ¥152 in October.

Even as U.S. interest rates have prompted traders to sell currencies like the yen, the Swiss franc has managed to remain a safe haven. What is going on?

The dollar remains a key hard currency for the world, reflecting the United States’ status as the world's largest economy and its deep, diverse financial and capital markets. Central banks around the world overwhelmingly hold dollars as foreign currency reserve assets.

But since the dollar has a tendency to fluctuate greatly, the Swiss franc and the Japanese yen have long functioned as safe currencies against the dollar, partly to diversify risk. Common factors for Switzerland and Japan included a long history of low inflation, a persistent current account surplus with the status of an external creditor nation and relatively stable political and financial markets.

The yen had appreciated since 2007, just before the global financial crisis and eventually reached below ¥80 against the dollar. After that, the yen depreciated toward around ¥125 until mid-2015 due to significant monetary easing. Since 2017 it hovered around ¥110, but from around March, the yen has depreciated sharply, falling to 32 year lows.

By contrast, the Swiss franc has trended higher against the U.S. dollar since the 2000s, reaching a peak of around 0.88 Swiss franc in early 2021. The Swiss currency depreciated somewhat this April but has since maintained more or less parity.

For many years, the central bank frequently intervened in the foreign exchange rate market to stem the strong appreciation pressures on its currency. The Swiss franc is currently much higher, hovering around parity per euro.

The U.S. Treasury Department's semiannual foreign exchange report used to put Switzerland on a list of countries to be monitored, as its foreign exchange intervention had been viewed as problematic.

However, in the latest foreign exchange report released in June 2022, the United States does not see Switzerland as problematic, even though it was the only country that met the three conditions used for selecting major U.S. trading partners for monitoring. The three conditions include the size of the bilateral trade surplus with the United States, the size of the current account surplus and one-way, persistent foreign exchange intervention. Japan, Germany, South Korea, Singapore and Taiwan all met two conditions, as well as China, which met only one condition, were all included on the list.

Why was only Switzerland excluded? Switzerland has been conducting discussions with the U.S. government since 2021 and at the same time has long emphasized its peculiarities externally.

Switzerland's relatively low corporate tax rate and open economic environment have led to a large number of multinationals establishing headquarters there and being listed on the Swiss stock exchange. These activities boosted its current account and trade surpluses. The Swiss government is of the view that there is a statistical distortion, since most of their international activities take place globally outside of Switzerland.

Furthermore, Switzerland's current account balance is large relative to its gross domestic product, but its absolute amount is small compared with other large surplus countries such as Germany, Japan and China. Moreover, because of its small open economic feature, exchange rate fluctuations have a greater impact on domestic inflation, thus foreign exchange intervention is inevitable for maintaining price stability.

So even though the central bank had been purchasing foreign currencies to contain the upward pressure of its currency, the Swiss franc remained excessively overvalued.

Currently, the Swiss franc's exchange rate has been largely unaffected by rising interest rate differentials with the United States, even as higher U.S. interest rates have sharply weakened many other countries' currencies, including the euro and Japanese yen.

The Swiss franc also appreciated against the euro despite the higher eurozone interest rates. In October, the Swiss National Bank indicated that the franc is no longer overvalued so that foreign exchange intervention is no longer necessary.

Why does the Swiss franc remain a safe-haven currency without depreciating significantly? One reason could be that Switzerland's trade surplus remains relatively large while the trade balances of the eurozone and Japan turned deficits.

Another could be associated with the two policy rate hikes. Switzerland used to maintain a negative interest rate policy of minus 0.75% in order to prevent the currency from appreciating. The inflation rate began to rise above 2% in February, mainly due to an energy price surge, and peaked at 3.5% this August.

Given that Switzerland defines price stability as “inflation below 2% and no deflation tolerated,” the policy rate was raised to 50 basis points this June and further by 75 basis points three months later, reaching 0.5% currently. The Swiss franc has not depreciated significantly partly because rate hikes have been more than the market expected together with the strong message from Swiss banking authorities that they would make further interest rate hikes if necessary to achieve price stability.

Is Switzerland worried about a loss of international price competitiveness? The nominal effective exchange rate, which includes the currencies of its major trading partners, is stronger, but the real effective exchange rate is not very high because Switzerland's inflation rate is lower than in other countries.

That’s why the central bank does not seem to worry about price competitiveness. On the contrary, since the currency has not depreciated much, there is almost no inflationary pressure arising from currency depreciation. The latest inflation number declined to 3%. This is the difference from the eurozone and the United Kingdom, where the inflation rates are about 10% or more due to high energy prices and currency depreciation that partly reflect trade deficits.

It will also be interesting to see if the yen regains its safe-haven status in the future.

Sayuri Shirai is a professor at Keio University and a former policy board member of the Bank of Japan.