Nov. 30 (Bloomberg) -- Switzerland, a nation of 7.8 million embroiled in the Bernard Madoff ponzi scheme scandal and tax- evasion disputes with the U.S., is gaining favor among foreign- exchange traders drawn to its outperforming economy.

The number of wagers on a gain in the franc against the dollar exceeded bets on a decline by 10 times this month, data from the Commodity Futures Trading Commission showed. That’s the widest gap since the fourth-quarter of 2004, when the currency was rallying 9.3 percent versus the greenback. Underscoring their optimism, traders drove the franc to parity with the dollar last week for the first time since April 2008.

Switzerland suffered the shallowest recession among the Group of 10 industrialized nations, as measured by Bloomberg data. Its performance lagged behind only Australia, the sole G- 10 member to avoid recession. The Swiss economy is forecast to shrink less than half as much as the euro region this year, 1.9 percent compared with 4 percent, the Organization for Economic Cooperation and Development said Nov. 19, aided by an expanding current-account surplus -- the broadest measure of trade.

“There’s very substantial underlying demand for Swissie, generated by one of the developed world’s largest current- account surpluses,” said Paul Meggyesi, a currency strategist in London at JPMorgan Chase & Co., which turned bullish on the franc Nov. 24. “I fail to see the economic emergency which will motivate the SNB to continue to offset that pressure with very substantial foreign-exchange purchases.”

Reducing Sales

Rising interest rates will lead the Swiss National Bank, or SNB, to reduce its sales of the franc, according to UBS AG and Credit Suisse Group AG, Switzerland’s biggest lenders. SNB President Jean-Pierre Roth said last week central banks may end stimulus measures “soon.”

Switzerland, known for its banking secrecy laws, has had to contend with its role in the Madoff losses and a growing international backlash over its work with wealthy clients to avoid taxes.

France’s market regulator, Autorite des Marches Financiers President Jean-Pierre Jouyet, said in June that UBS, a custodian bank to funds that entrusted money with Madoff, ought to reimburse investors in the funds for their losses. In August the U.S. and Switzerland settled a Justice Department lawsuit against UBS seeking the names of Americans suspected of evading taxes through 52,000 secret Swiss accounts.

Weakening Franc

The franc weakened on Nov. 26 as the SNB sold the currency, traders said, after reaching the strongest level in five months against the euro and climbing to parity with the dollar for the first time in 19 months the day before. It was little changed at 1.5080 per euro as of 9:56 a.m. in London, and strengthened 0.4 percent to 1.0024 versus the dollar.

Werner Abegg, a spokesman in Zurich for the central bank, declined to comment. The SNB hasn’t discussed currency movements since it announced the initial intervention in March. Switzerland is the third-biggest center for currency trading after the U.K. and U.S., according to the Bank for International Settlements in Basel, Switzerland.

Traditionally used as a funding currency for investors seeking higher yields, or as a haven during times of economic turmoil, the franc is now attracting investors betting the SNB will slow intervention that kept it little changed versus the euro since March. Central banks intervene by purchasing or selling currencies to influence exchange rates.

Roth Departs

“The impression is widely shared that the framework of measures put in place during the crisis will have to be corrected soon,” Roth, who is being succeeded by Philipp Hildebrand in January, said in Geneva on Nov. 24, without referring specifically to Switzerland.

Roth reiterated in an interview with Neue Zuercher Zeitung published two days ago that the central bank will stick to its policy on the franc. The Federal Reserve repeated a commitment this month to keep its target interest rate for overnight loans between banks “exceptionally low” for an “extended period.”

“The outlook is positive for the Swiss franc,” said John Praveen, the chief investment strategist in Newark, New Jersey, at Prudential International Investments LLC, a unit of Prudential Financial, which manages about $641 billion. “The SNB might be one of the first central banks to start neutralizing interest rates. That should lead to appreciation against the dollar and the euro.”

Four Times

When the central bank announced its first intervention on March 12, policy makers said they were concerned about deflation, or a general decline in consumer prices. Prices fell month-to-month only twice since then, dropping 0.3 percent in March from February, and 0.7 percent in July from June.

Policy makers intervened four times, Mansoor Mohi-uddin, the chief currency strategist at Zurich-based UBS, Switzerland’s biggest bank, wrote in a report Nov. 26. After initially selling francs on March 12, when the exchange rate strengthened to 1.4753 per euro, the central bank intervened again on June 24 as the franc appreciated to 1.5012. The SNB also acted on Sept. 30, when it climbed to 1.5079, Mohi-uddin said.

The SNB first sold the franc to counter a 7.6 percent advance against the euro in the previous six months. It fell as much as 3.6 percent versus the euro, the most since the 16- nation currency’s introduction in 1999.

“The psychological level for euro-Swiss is 1.50, but the SNB has never committed itself to a specific rate,” said Marcus Hettinger, a foreign-exchange strategist at Credit Suisse in Zurich. “Our fair-value model shows the franc should be well below 1.50.”

Franc Forecasts

Contracts betting the franc would climb against the dollar rose to 25,333 on Nov. 10, compared with 2,482 wagers the Swiss currency would fall, according to data from the CFTC in Washington based on contracts at the Chicago Mercantile Exchange. The difference was the most since December 2004.

The franc will strengthen to 97 centimes per dollar next year, according to UBS. Zurich-based Credit Suisse predicts 93 centimes. New York-based JPMorgan, which previously said the franc would trade at 1.01 per dollar, now says 91 centimes.

UBS and JPMorgan, the No. 2 U.S. bank, say the franc will appreciate 4.1 percent to 1.45 per euro. Credit Suisse predicts 1.48.

There’s a 59 percent chance the franc will reach Credit Suisse’s target against the dollar by the third quarter, implied volatility from options trading tracked by Bloomberg shows. The prediction by UBS and JPMorgan for the franc versus the euro has a 45 percent probability, according to the data.

Strategic Bears

Options show gains even as the median estimates in surveys of at least 28 analysts by Bloomberg forecast the franc will weaken in 2010, to 1.57 per euro and 1.08 per dollar.

“It’s probably going to stay sideways against the euro,” said Scott Ainsbury, a money manager at New York-based FX Concepts, a currency-focused hedge fund.

Switzerland’s trade surplus widened to 2.46 billion francs ($2.45 billion) in October, from the low this year of 156 million francs in March, data from the Federal Customs Administration show.

The nation’s current-account surplus rose to 13.2 billion francs in the three months ended June 30, from 8.5 billion the previous quarter, according to SNB data. The projected 2009 surplus of 6.1 percent of gross domestic product compares with a deficit in the euro region of 0.7 percent of GDP, data from the International Monetary Fund compiled by Bloomberg show.

‘Psychological Level’

The franc is 4.6 percent undervalued against the euro, according to purchasing power parity, which measures the relative price of goods across countries, Bloomberg data show.

“Next year the SNB is likely to start raising interest rates, and there will be a conflict between domestic monetary policy and exchange-rate policy and they will refrain from intervening,” UBS’s Mohi-uddin said.

The SNB will boost the three-month Libortarget rate to 0.50 percent from 0.25 percent by the third quarter, according to a weighted average of 14 analyst forecasts compiled by Bloomberg. The ECB will raise its main rate to 1.25 percent, from 1 percent, while the Fed’s rate will climb to 0.75 percent, from a range of zero to 0.25 percent, Bloomberg data show.

Signs the recovery is spreading through the Swiss economy may make it easier for the SNB to reduce its intervention, said JPMorgan’s Meggyesi.

Zurich-based ABB Ltd., the world’s biggest supplier of power grids, said third-quarter earnings before interest and tax rose 10 percent. Basel-based Novartis AG, Switzerland’s second- largest drugmaker, raised its 2009 sales forecast and reported higher third-quarter profit on Oct. 22 as revenue rose.

“Ultimately, what will motivate the SNB to scale back this policy is a recognition that the policy is no longer economically necessary,” Meggyesi said.

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Chris Fournier in Montreal at cfournier3@bloomberg.net

Last Updated: November 30, 2009 05:03 EST