EUROPE: Swiss Franc Enjoys Safe-Haven Edge

Global Finance, May 2004

Concerns about terrorism and the uprising against the occupation of Iraq caused a shift out of US dollars and into Swiss francs in mid-April.

The fiercest fighting in Iraq since President Bush declared an end to major combat a year ago boosted the Swiss franc, which has a tradition as a safe-haven currency.

The "Swissie," as the currency is known by traders, also benefited from talk of an eventual rise in Swiss interest rates at a time when the European Central Bank is being pressured to cut rates to stimulate the sluggish European economy.

The Bank of England held UK interest rates steady at 4.0% for the second month in a row in April, but analysts expect it to raise rates a quarter-point this month.

"The case for tightening remains clear, given accelerating strength in domestic rate-sensitive sectors," says Anne Mills, director of currency research at Brown Brothers Harriman in New York.

"Employment and wage growth have picked up, retail sales are strong, and the housing market is red-hot," Mills says. "All this adds up to inflation risk."

The strong British pound was likely a main factor in convincing the Bank of England to put off a rate increase in April, analysts say. The bank already has boosted rates by a half-point since last November.