“The motive here is to reduce the inflow of capital into the Swiss economy and limit the currency from appreciating further given the detrimental impact of this appreciation on their export sector,” Said Al-Shaikh, senior vice president and group chief economist at the Jeddah-based National Commercial Bank (NCB), said.
The move was seen by some analysts as a new shot in the currency wars, with Japan expected to try to weaken the yen if the Swiss action diverts more safe-haven inflows into the currency.
Gold, seen as a safe bet in times of economic uncertainty, jumped on Tuesday to a record high price above $1,921 an ounce on the London Bullion Market. It finished the day flat at $1,895.
The Swiss action has nothing to do with the dollar, said Paul Gamble, head of research at the Riyadh-based Jadwa Investment.
“Switzerland is pegging to the euro as that it is the currency of its main trading partners. Safe haven inflows had pushed the franc to a level that was very damaging for Swiss exporters,” Gamble told Arab News.
Using some of the strongest language from a central bank in the modern era, the Swiss National Bank (SNB) said Tuesday it would no longer tolerate an exchange rate below 1.20 francs to the euro and would defend the target by buying other currencies in unlimited quantities.
The move immediately knocked about 8 percent off the value of the franc, which had soared by a third since the collapse of Lehman Brothers in 2008 as investors used it as a safe haven from the euro zone’s debt crisis and stock market turmoil, news agencies reported.
Commenting on the SNB move, Al-Shaikh added: “The impact of pegging Swiss franc to the euro may help strengthen the euro due to current debt crisis.”
For this action to be credible, he said the SNB would be converting significant part of their reserves into euros in order to intervene and protect the peg.
Accordingly, the dollar will be under more downward pressure after this decision.
But Al-Shaikh said: “Dollar is still the No. 1 currency in the world as it dominates nearly 60 percent of the currency reserves of central banks across the globe.”
Jarmo T. Kotilaine, chief economist at the NCB, said one should not exaggerate the global implications of the Swiss decision as it was primarily motivated by national considerations.
“The Swiss franc has in recent months seen its safe haven status bolstered as the eurozone has stumbled along from one crisis to the next and questions have multiplied about the creditworthiness of the US. This ‘favored currency status’ has resulted in persistent upward pressure on the franc which has appreciated steadily vis-à-vis the euro and thereby undermined the competitiveness of Swiss exports and tourism as compared to the rest of Europe. The decision to introduce a ceiling on the franc-euro exchange rate is an attempt to limit such volatility and to curb the adverse effects on the Swiss economy from factors that are only very partially related to Switzerland,” Kotilaine said.
About the impact of the Swiss decision on Gulf Cooperation Council countries where most of the currencies are pegged to the dollar, he said: “The GCC countries, of course, have a long history of pegging their currencies to the dollar. If anything, the Swiss move will reinforce the validity of that policy by highlighting the risks that a floating exchange rate can create in an environment of significant global imbalances and economic asymmetries. Were the GCC currencies to genuinely float, they would have appreciated significantly, and possibly disproportionately against the backdrop of macroeconomic stability and strong oil prices. As much as questions about the dollar are growing in number, the dollar pegs still serve as a source of stability, continuity, and predictability. In terms of currencies that can serve as anchors, there are few alternatives to the dollar and the euro, although both are in serious trouble.”
Kotilaine said the global significance of the move is likely to be limited, although it very clearly highlights the broader problem that the confluence of substantial and persistent global economic imbalances is creating in a currency system with very few genuinely moving parts.
He said Switzerland is one of the few developed economies with healthy fundamentals and a floating exchange rate.
In the relative absence of other safe options, he said the Swiss franc had tended to be affected disproportionately by investors’ search for safety. Assuming the SNB can successfully defend the ceiling, the decision may put additional pressure on other perceived safe haven currencies, whether the yen, the Scandinavian currencies, or the Canadian, Australian, and New Zealand dollars.
Kotilaine, however, added: “It may also trigger similar movements elsewhere, thereby increasing the rigidity of the global currency system and reducing the prospects for rebalancing through exchange rates. On the margin, the move may also benefit the US dollar, whose safe haven status, while tarnished, is by no means fully gone.”
Fears that the world economy may tip back into recession have spurred investors to dump riskier assets such as stocks and seek the relative safety of gold and the franc and yen. Gold, seen as a safe bet in times of economic uncertainty, jumped to a record high price of $1,921.17 an ounce on the London Bullion Market.
The SNB has warned that economic growth is set to slow sharply in the coming months as the strong franc makes Swiss exports, from luxury watches to drugs, prohibitively expensive, Reuters said.
The franc nearly touched parity with the common currency on Aug. 9. It dived 8.5 percent against the euro after Tuesday’s announcement to 1.203 francs at 1051 GMT and dropped almost 8 percent against the dollar to 0.848.
The SNB also set a formal exchange rate target in 1978 — above 0.80 francs per German mark - when the franc was soaring in the aftermath of an oil crisis, and successfully defended that rate, but at the price of soaring inflation.
The SNB’s forex holdings had already surged to 253.4 billion francs in August as a result of foreign exchange swaps the SNB launched to ease the franc.
Swiss Economy Minister Johann Schneider-Ammann, who has proposed 870 million francs in government aid to counter the impact of the franc, welcomed the SNB action.
The SNB step should also help economies in Eastern Europe with two-thirds of mortgages in Hungary and about half of Poland’s denominated in Swiss francs.
