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FT editor Roula Khalaf selects her favorite stories in this weekly newspaper.
Consider the adventurous Swiss National Bank, which finds itself on the receiving end of Donald Trump’s dollar drama.
The Alpine central bank, custodian of one of the three big reserve currencies in the global financial system, wears the scars of several fierce market battles over the past few years, usually not of its own making. Today’s franc dispute is particularly intriguing.
The problem is that the US currency has been unfriendly in the early weeks of 2026. One reason is that US interest rates are falling, and unlike other major economies, are likely to go lower still. Secondly, investors outside the US are looking to do something big: hold large reserves of assets in other currencies over time, in an effort to avoid the effects of a US institutional decline, or retain US assets but sell the currency to help ease the pain. Foreign asset managers can no longer rely on money when their US stocks decline, so they have to take matters into their own hands.
The result is a wet dollar. The dollar index, which tracks its value against a basket of other currencies, has fallen a steep 1.5 percent so far this year to its lowest point since 2022. The gains on the other side of the ledger are concentrated in Europe, including in the euro, which is at $1.20, and in sterling, which is at its strongest point since 2021, which provides another opportunity for a slow clap on the “UK needs an IMF bailout”. Bloviators, who have become extremely cool.
However, against the Swiss franc, this is all exaggerated. So far this year, the dollar has fallen by about 4 percent against the franc. Leaving aside the Swiss currency’s big surge in 2015 – a whole other story related to the SNB lifting a long-standing freeze on its value – this is the so-called Swiss currency’s strongest position since 2011. It is rising more, though less dramatically, than the neighboring euro.
This is a serious pain for policymakers in Switzerland, which has a small, open economy. A strong franc makes its goods more expensive for foreigners and drags inflation below target.
However, his options for responding are limited. It could cut interest rates, already at zero, into negative territory, which is reluctant to create ugly distortions in asset prices after their previous long-running standoff with sub-zero rates. Analysts and investors say it will do so only under severe pressure. Or it could intervene directly in currency markets to try to drag the franc down, but risk upsetting the US in return.
She is not attractive. It’s not so long ago that Switzerland managed to get off America’s list of currency manipulators, and even less long ago when it enticed the Trump administration with golden gifts to back out of some of the highest trade tariff rates on the planet.
This is a place very few policy-makers will want to be and is one of the many strange side effects of a declining dollar by 2026.
As January comes to an end, this is becoming very clearly visible. The first month of the year has brought a very solid performance for US stocks – with the benchmark S&P 500 index up about 1.5 per cent and surpassing 7,000 for the first time, completing a sustained rise since the April 2025 global tariff shock. The index is holding steady despite sharp declines in some supersized tech stocks this week, notably Microsoft.
But, as of 2025, these gains will be wiped out for investors outside the US due to a declining dollar. The 1.8 percent rise in the stock index so far this year actually represents a small loss in the euro, a slightly larger loss in sterling and a real stinker in the Swiss franc.
As one big pension investor told me this week, it’s important not to “over-rotate” from US markets. But if asset managers are not managing those currency risks then they are not doing their job properly. Since dollar hedging involves the sale of dollars, it can very easily become self-perpetuating.
The good news is that if Trump really wanted to, he could change a lot about this matter with a loud and clear announcement that he would keep his hands off the Federal Reserve under new leadership of the central bank starting in May. On Friday, they offered some hope on that front, naming Kevin Warsh, known as a highly rated defender in the past, to the top job, helping stop the bleeding in the Bucks.
But it’s brave to assume that the President would leave Warsh to do his job, and it’s hard to believe that Warsh got the approval in the first place without indicating that he was willing to keep hacking rates down.
Swiss policymakers are perhaps caught in the most obvious end of this soap opera, but central bankers around the world, from investors outside the US to importers and exporters of every stripe, will be caught up in the drama in the coming months.
Building a defensive shield against further self-inflicted wounds to the dollar, which is still strong by historical standards, is really the only prudent way forward.
katie.martin@ft.com
