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Swiss franc nosedives against dollar

The Swiss franc has hit a ten-year low against the dollar, which has been trading above SFr1.70 for the first time since June 1989. The franc is being dragged lower in the wake of a plunging euro.

The Swiss franc has hit a ten-year low against the dollar, which is trading above SFr1.70 for the first time since June 1989. The franc is being dragged lower in the wake of a plunging euro, which has dropped to another all time low against the US currency.

The single European currency used by 11 of the European Union's member states has seen a steady decline in its value against other major currencies since its launch 16 months ago. Against the dollar, it has lost around 20 per cent of its worth.

Its weakness is at odds with more and more evidence of a strong European economy, but the US is in an even better position.

"We are waiting for the first quarter GDP results from the US and it's likely we'll see a figure of around 6 per cent or even more" says Cantrade private bank economist Marcus Allenspach. "It's clear that if the US has such strong growth and an inflation problem then interest rates in the US will rise much faster than in Europe."

The expectation of higher US interest rates drawing investment out of Europe is one reason for the dollar's strength. But the euro is also suffering for political reasons.

"The problem now is that the European Central Bank keeps on talking about what the finance ministers should do about the currency and the ministers keep on telling the ECB that they'll deal with the currency and that the ECB should focus on inflationary worries", said Allenspach. "As long as there is no strong leadership, there'll be no strong euro."

The franc is mirroring the weakness of the euro and has fallen to its lowest level against the dollar for more than a decade.

But other European currencies outside the euro-zone are faring much better. The external value of the British pound for example is at a 14 year high. But analysts say Switzerland is in a very different position both politically and economically.

"Remember we have the referendum on the bilateral agreements with the European Union on May 21," says Allenspach, "and everybody assumes that the Swiss National Bank is trying to keep the franc stable against the euro in the run-up to this crucial vote. Moreover, in the UK short-term interest rates are 6 per cent while money market rates in Switzerland are 2 ½ to 3 per cent."

The weakness of the franc against the dollar will undoubtedly boost exports to the US, but domestic demand will also draw in imports, threatening the SNB's inflation policy.

And for now, analysts say there is little respite for either the franc or the euro.

They say it would take drastic action by the US Federal Reserve to restrain the dollar and that an anticipated 25 basis point rise in ECB interest rates expected this week has already been factored in.

by Michael Hollingdale

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