The “massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy”, said the Swiss National Bank (SNB) this week. With the strong Swiss franc threatening to choke off growth and cause deflation, the SNB announced that it was abandoning its floating exchange rate and drawing a line in the sand at SFr1.20 to the euro. It will buy unlimited amounts of foreign currency to prevent the franc strengthening beyond this rate. The exchange rate soared beyond 1.20 on the news, having reached 1.10 before the statement. The euro had hit a record low of around parity in August.
What the commentators said
The SNB faces “a bloody battle” holding the line “against the search by investors for safe havens”, as Rabobank’s Jane Foley pointed out. More broadly, “the market must fear this will lead to a sharp escalation in currency wars”, said HSBC’s David Bloom.
China and the US have suppressed the value of their currencies, noted Larry Elliott in The Guardian. Brazil has implemented capital controls. Japan has intervened to weaken the yen and now Switzerland has stepped in. There is “a strong and growing temptation” for others to follow. Norway and Sweden might be next, given that they are viewed as safe havens and some of the money no longer welcome in Switzerland will head there. Japan is expected to wade into the forex market again, and both the US and Britain may print more money, which will undermine the dollar and the pound. Not everyone can win a currency war, said Bloom, “but that doesn’t mean they won’t keep trying”. An increase in currency manipulation raises the spectre of an eventual descent into Thirties-style protectionism. Avoiding this fate, said Richard Barley in The Wall Street Journal, is “looking harder by the day”.
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