Ceiling on Swiss Franc vs. Euro Exchange Rate

by Ben Foster and Caleb Pietrafesa

On Tuesday September 6^th, 2011 the Swiss National Bank set a ceiling of 1.2 Francs per euro in order to weaken the currency and avoid “deflationary development.”[1] The Swiss economy was in danger of “massive overvaluation” due to the major inflow of capital.[2] The Swiss currency and its economy is considered economically stable and low-risk, therefore investors moved their assets into Swiss investments in order to avoid the current volatility in the global market. The Swiss National Bank was adamant in its statement that it would not allow Swiss currency to appreciate further and risk hurting the economy, saying that it is willing to purchase “unlimited quantities” of foreign currency.[3]

The depreciated currency will not only benefit the Swiss economy by making Swiss products more appealing to foreigners and therefore increase exports, it will also benefit the citizens of many countries such as Hungary and Poland who are in massive debt to Switzerland.[4] Households in these countries are indebted in the Swiss franc, and because of the ceiling they will have to pay back a lesser value as well as a lower real interest rate due to the weaker purchasing power of the Swiss Franc.[5] This will stimulate both the Swiss and other countries’ economies avoiding the dip in economic activity that Switzerland would have faced had its currency continued to appreciate due to the increase in demand for the currency.

Switzerland’s attempt to sidestep the danger of “deflationary development” by implementing the ceiling on the currency is a bold and well thought out strategy. The devaluation of its currency should effectively stimulate exports and keep its currency affordable in foreign markets. The positive impact the weakened currency will have on the Swiss market as well as the markets of other European countries affirms the accuracy of the Swiss National Bank’s decision. So far in the first few months of Switzerland’s new monetary policy, the Central Bank has been successful in depreciating the Swiss Franc as the overvalued currency has weakened in comparison to the Euro and US dollar causing foreign investors to diversify their assets selling off Swiss Francs in order to do so.[6] This depreciation will continue and ensure that exports will remain high and thus Switzerland’s economic growth will not be hindered, as the overvaluation of the Swiss Franc will have been avoided.

Bibliography

Ball, Deborah. “Switzerland Caps Franc - WSJ.com”, September 7, 2011. http://online.wsj.com/article/SB10001424053111904900904576553923594598048.html.

Jolly, David. “Swiss Central Bank Acts to Put a Cap on Franc’s Rise.” The New York Times, September 6, 2011, sec. Business Day / Global Business. http://www.nytimes.com/2011/09/07/business/global/swiss-franc.html.

Kruk, Marynia. “Swiss Franc Ceiling Sends Zloty, Forint Surging - Emerging Europe Real Time - WSJ”, September 6, 2011. http://blogs.wsj.com/emergingeurope/2011/09/06/swiss-franc-ceiling-sends-zloty-forint-surging/.

Meaken, Lucy. “Swiss Franc Strengthens Against Euro as Currency Cap Speculation Recedes - Bloomberg”, October 12, 2011. http://www.bloomberg.com/news/2011-10-12/swiss-franc-strengthens-versus-euro-as-currency-cap-speculation-recedes.html.

“Swiss franc depreciation continues - still heavily overvalued as compared to the Euro and the Dollar”, August 27, 2011. http://www.marketobservation.com/blogs/index.php/2011/08/27/swiss-franc-depreciates-further-still-heavily-overvalued-as-compared-to-the-euro-and-the-dollar?blog=13.

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[1] David Jolly, “Swiss Central Bank Acts to Put a Cap on Franc’s Rise,” The New York Times, September 6, 2011, sec. Business Day / Global Business, http://www.nytimes.com/2011/09/07/business/global/swiss-franc.html.

[2] Ibid.

[3] Ibid.

[4] Marynia Kruk, “Swiss Franc Ceiling Sends Zloty, Forint Surging - Emerging Europe Real Time - WSJ”, September 6, 2011, http://blogs.wsj.com/emergingeurope/2011/09/06/swiss-franc-ceiling-sends-zloty-forint-surging/.

[5] Ibid.

[6] “Swiss franc depreciation continues - still heavily overvalued as compared to the Euro and the Dollar”, August 27, 2011, http://www.marketobservation.com/blogs/index.php/2011/08/27/swiss-franc-depreciates-further-still-heavily-overvalued-as-compared-to-the-euro-and-the-dollar?blog=13.