Switzerland Punished For Its Strength As Europe Slides, FXF Down

Switzerland Punished For Its Strength As Europe Slides, FXF Down

The Swiss Franc has faced challenges in the past year as Europe’s debt crisis caused the currency to appreciate against the Euro. The appreciation of the currency caused such economic difficulties in the country that the Central Bank, the Swiss National Bank, imposed a limit on the exchange rate last September 6th as the SNB announced it was willing to purchase unlimited amounts of foreign currency in order to keep the exchange rate with the Euro in line with a ceiling it set of 1.20 Swiss Franc per Euro. That ceiling was broken today for the first time and though the situation has since relaxed the breach of the limit puts a new light on the central bank’s strategy and its future.

The strength of the Franc caused problems in the country last year as the price of the Franc surged to almost parity with the Euro, the price was recorder at 1.0075 on August ninth of last year just a month before the limit was installed. The increase in value caused demand for goods from Switzerland to fall as comparatively they became drastically more expensive. The Swiss manufacturing center accounts for just over 23% of the country’s GDP. Exports accounted for 52.7% of the country’s GDP in 2009. Any rise in the currency against the Euro can cause drastic effects on the growth of the Swiss economy stifling its growth.

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The Swiss Franc was weakened because of the strength it is perceived to hold in times of international turmoil. The country is viewed as one of the most stable in the world because of its neutrality and the historical longevity of its government. This has made the Franc a refuge against economic uncertainty and uneasy international circumstances. The Franc’s reputation as a haven has caused problems in the past and this is not the first time the Swiss National Bank has imposed such a limit on its currency. In 1978, when the Franc was rising against the Deutsche Mark, the SNB installed a similar limit. In that instance the control caused inflation in the country that rose to 7.5 percent in 1981.

The inflation of that period may not be the most accurate guide to the future of the Swiss economy. The seventies saw inflation all over the world as OPEC raised its oil prices. Switzerland was hit particularly hard by the move and was left with legislatively mandated days where private transport could not be used in order to reduce oil consumption. it is difficult to separate the causes of the inflationary pressure in the country and so almost impossible to know whether the situation will play out similarly now.

Another, possibly more pressing result, of the move in the 70s was the housing bubble that followed in the 1980s. Housing prices in the country have been rising and after the housing bubbles all over the world in 2008 this more than anything should be a cause for caution among the bankers there. A housing bubble or inflationary pressure caused by the bank’s policy are the main reasons the bank would h

Strength has become a weakness for many currencies seen as safe in an economic era when both the Euro and the Dollar are seen as risky investments due to debt. Hong Kong has suffered high inflation as its currency, which is pegged to the US dollar, is also being used as a stable store of value. Consumer prices rise as inflationary pressures cannot be played on the exchange markets. This is the central problem in Switzerland and will be the country’s major economic problem until a change of policy at the SNB or a major change in Europe’s fortunes. The Currency Shares Swiss Franc Trust (NYSEARCA:FXF) was down today and is hovering close to its 52 week low.

Today’s break of the ceiling was probably caused by Spain’s announcement of its difficulties in funding its government yesterday after a disappointing sale of bonds that just met minimum targets. The highlighting of the continued fiscal crisis among European nations has caused a flight into the Franc. The SNB pledged that it would continue to fight any and all attacks against the currency in the future. Whether or not they will be able to hold out is another question. If the Eurozone continues to suffer problems that may get worse the flight into the Swiss Franc may be too much to handle for the central bank. The inflationary pressure of keeping the currency unnaturally low may cause a change in policy from the bank that would see the currency rise in value by a great deal.

Speculation on the currency seems to be futile as the Swiss National Bank has maintained that it will defend against any and all attacks on the currency but whether or not they can hold out in the case of a more widespread European crisis is difficult to predict.