PAPER currencies have not been very popular of late—witness gold's surge to a record high against the dollar, sterling, the euro and the yen on July 18th. Near-zero interest rates and debt crises on both sides of the Atlantic make investors both risk-averse and nervous that governments might try to inflate their way out of the debt problem.

But there is one exception to the rule: the Swiss franc. As the chart shows, the franc is even stronger in trade-weighted terms than it was in the 1970s, a period when Switzerland imposed negative interest rates in an attempt to discourage foreigners from opening bank accounts.

Mansoor Mohi-uddin, a strategist at UBS, reckons that the franc, along with the Australian and Canadian dollars, has become part of a group of “shadow currencies” that are used by traders and investors to hedge their views on the global economy. Investors who are worried about the impact of America's fiscal and monetary problems on the dollar but want to bet on its economy, which is closely linked to Canada's, buy the loonie instead. Australia's commodity-rich economy makes its dollar attractive to those who would like to bet on China's economy without taking the political and corporate-governance risks of investing directly in the People's Republic.

The Swiss franc represents, in UBS's view, the modern equivalent of the old D-mark. Switzerland has many attractions for the risk-averse investor. It has an inflation rate of less than 1% and a current-account surplus that has reached 15% of GDP. Despite the strength of the franc, exports have performed well and the economy is forecast to grow by more than 2% in both 2011 and 2012. The IMF expects the government to run a small budget surplus this year, and gross government debt is 53% of GDP, well below that of most of its European neighbours.

One potential weakness of Switzerland, in the mind of many investors, has been its banking sector. Given that the banks' assets are many times the size of Swiss GDP, would the country have the financial strength to bail them out? But Geoffrey Kendrick, a currency analyst at Nomura, says the banks may have contributed to the recent strength of the franc. The process of contracting their balance-sheets has caused them to shift assets back home.

The Swiss have tried in the past to resist upward pressure on their currency. The Swiss National Bank (SNB) intervened to try to drive down the franc in 2009. ABB, one of Switzerland's largest companies, recently described the franc's strength as a headache. For Novartis, a pharmaceuticals giant, a 9% earnings gain in dollar terms during the first half of 2011 turned into a 16% loss in Swiss-franc terms. These problems have naturally led to speculation that the SNB might be tempted to take action once again, especially as Thomas Jordan, its vice-president, recently expressed concern on the issue.

But the previous round of intervention failed to stop the Swiss franc from rising and Mr Kendrick reckons the SNB may have lost Sfr38 billion ($46.3 billion) as a result. That matters because the SNB pays an annual dividend of Sfr2.5 billion to the country's cantons; last year, that payment had to be made out of the bank's reserves because of its foreign-exchange losses. Further losses would probably be politically unacceptable.

Nor has the Swiss economy been sufficiently damaged by the franc's strength to suggest intervention is worth the risk. The core measure of inflation has admittedly turned negative but the headline figure is still positive; back in 2009, prices were deflating by 1% a year. Switzerland's close ties to the German economic powerhouse are boosting growth. There is even talk that the SNB might increase interest rates later this year (they are currently just 0.25%), something that would be bound to increase the franc's attractions.

Are investors being rational? On the OECD's calculations of purchasing-power parity (a measure that adjusts for relative prices), the franc is 42% overvalued against the euro and 44% against the dollar. If the markets were suddenly to become more optimistic about the outlook for the global economy, or if Europe's politicians solved their debt crisis, the Swiss franc would be vulnerable to a fall.

On the other hand, it seems sensible for investors to have an alternative bolthole to gold, an asset that delivers no yield at all, is very difficult to value, has risen sixfold from its 2001 low and which attracts the kind of public enthusiasm that has marked bubbles in other assets. The Swiss may not like the strong franc, but they could be stuck with it for a while.





Economist.com/blogs/buttonwood