Currency

Swiss Franc: Is The Peg Working?

The news today about the resignation of the chairman of the Swiss National Bank made us wonder how that whole currency peg is working out for them.

Switzerland faced an unusual problem this year — it's economy was doing so well that nervous investors around the world started flocking to its currency. That made the value of the franc shoot up — which caused big problems for the country's exporters.

In September, the central bank announced that it would "buy foreign currency in unlimited quantities" in order to drive the value of the franc down. Essentially, the bank pledged to sell as many francs as investors wanted and to take in their euros, yen and dollars in return. Their goal is to keep the exchange rate from dropping below 1.2 Swiss Franc per euro.

At the time, Charles Wyplosz, an economist at the Graduate Institute in Geneva warned us that maintaining a peg to the euro would be difficult to do:

The central bank goes and says "You people want swiss franc...I will provide you whatever you need." This whatever you need can be totally gigantic given the small size of the Swiss economy, and the huge size of world financial market. The Swiss central bank might have to absorb, twice, three times, four times its own money supply before it has any effect on the market.

The peg has been in effect for four months now, so we called back Wyplosz to see how it's working out:

Before the decision in September, [the Swiss National Bank] took in something like 200 billion euros which means a tripling of their balance sheet, since then nothing much has happened. The day they made their announcement that spooked the markets and the markets stopped pressing.

Investors believed the central bank would do whatever it took to maintain the peg and they backed off. For now, it seems to be working, although Wyplosz stresses that is for now.

"The world has become even more uncertain and more dangerous than before so that's why there might be new pressure on the franc," he says.

Even though the franc has weakened in recent months, many people in the country feel it has not gone low enough. They are pushing the central bank to raise the ceiling. Why? Switzerland sells most of its goods to the rest of Europe and these days the rest of Europe isn't really buying. The Swiss are facing the double whammy of a strong currency and a struggling customer base. As a result, their economy is expected to grow just 0.2 percent next year.

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