Swiss franc carry trade comes fraught with safe-haven rally risk

Investors turn to Swiss franc for carry trades, facing risks of rapid rallies amid global market turmoil.

As investors turn to the Swiss franc as an alternative to Japan's yen to fund carry trades, the risk of the currency staging one of its rapid rallies remains ever present.

The Swiss franc has long been used in the popular strategy where traders borrow currencies with low interest rates then swap them into others to buy higher-yielding assets.

Its appeal has brightened further as the yen's has dimmed. Yen carry trades imploded in August after the currency rallied hard on weak U.S. economic data and a surprise Bank of Japan rate hike, helping spark global market turmoil.

The Swiss National Bank (SNB) was the first major central bank to kick off an easing cycle earlier this year and its key interest rate stands at 1.25%, allowing investors to borrow francs cheaply to invest elsewhere.

By comparison, interest rates are in a 5.25%-5.50% range in the United States, 5% in Britain, and 3.75% in the euro zone.

"The Swiss franc is back as a funding currency," said Benjamin Dubois, global head of overlay management at Edmond de Rothschild Asset Management Suisse.

The franc is near its highest in eight months against the dollar and in nine years against the euro , reflecting its status as a safe-haven currency and expectations for European and U.S. rate cuts.