Switzerland not alone in currency battles

Tokyo's business district appears calm, but the rising yen poses major problems. AFP

While Switzerland may feel isolated in Europe as it fights against the ill effects of a strengthening currency, it is certainly not alone in global terms.

This content was published on October 27, 2011 minutes

Scandinavian countries have recently joined nations as diverse as Japan, Brazil, Australia and Canada on currency watch as exporters weigh up the potential consequences of soaring prices for their goods.

The Swiss National Bank (SNB) tried in vain to haul back the inflating franc by buying massive sums of euros and cutting interest rates to virtually zero. In September, the central bank threw its last dice by pegging the franc at SFr1.20 against the euro.

The SNB’s actions immediately led to speculation that Sweden and Norway could follow suit as the currencies of those two countries became more attractive to investors.

Japan has been hit by the same woes as Switzerland, with the safe haven yen attracting a multitude of investors hiding from market volatility. But the problems there have been multiplied by the sheer size of the world’s third largest economy that also relies heavily on exports.

Massive intervention

In August, Japan intervened with a record 4.5 trillion yen (SFr52 billion, $60 billion) one-day  intervention in the currency markets, followed by another 5.5 trillion on Thursday.

The government has also introduced a massive $100 billion (SFr88 billion) credit facility to encourage Japanese to invest abroad. Switzerland rejected a proposal from UBS bank economists for a similar fund earlier this year.

But the measures appear to be having little effect, with the yen still hovering dangerously high against the euro and the US dollar. A survey of 105 leading Japanese firms in August indicated more than half were considering moving some factories and offices overseas.

Toyota appears to have lost its unofficial status as leading car manufacturer to Germany’s Volkswagen. The Japanese firm says it loses 34 billion yen (SFr390 million) in profits for every yen the currency rises against the greenback.

Number crunchers at the Japan Research Institute have calculated that unfavourable exchange rates against the euro alone could cost the manufacturing sector 150 billion yen (SFr1.7 billion) in profits in the next six months.

Punitive taxes

Brazil has been a vocal critic of the United States, accusing the superpower of engaging in currency warfare with its policy of devaluing the dollar through a policy of printing money – known as quantitative easing.

Ironically, before the financial crisis the US had challenged China’s policy of buying up vast quantities of foreign reserves to keep its own currency artificially low.

Unable to slash interest rates significantly for fear of further stoking already high inflation, Brazil has opted for a more aggressive and controversial tactic to combat the rise of its currency, the real.

In 2009, the Brazilian government introduced a series of punitive taxes on foreign exchange inflows and bond purchases. This is a trick Switzerland tried unsuccessfully in the 1970s as the franc gained in value against the German mark, and the Brazilian stock exchange has recently complained at its own government’s actions.

Commodity pressures

During his recent visit to Brazil, Swiss Economics Minister Johann Schneider-Ammann told that Switzerland would “absolutely not” be copying such tactics.

“I do not think it is a good idea to protect our market with a punitive tax,” he said.

Brazil still has more room to manoeuvre than some other countries, thanks to its high interest rates, according to Julius Bär chief economist Janwillen Acket.

“Japan’s interest rates are already virtually at zero so it has to come up with a more creative solution, like Switzerland,” he told

Acket added that commodity-dependent safe haven currencies - such as those of Australia, Canada and Norway – may begin to stave off over-valuation if the global economy starts to sink once more, reducing demand for their oil and minerals.

“The global trend of competitive devaluation comes against the backdrop of a global economic slowdown,” Acket said. “This could soon start to make some currencies look less attractive.”

Acket’s sentiment echoes the thought of many observers that individual countries are relatively powerless to stave off round after round of economic shocks that have shaken markets in the last three years.

Safe haven franc

The Swiss franc is a so-called “safe haven” currency, which means that investors and speculators buy it when other currencies, including the euro and the dollar, are under pressure.  

The Swiss National Bank has emphasised that it does not pursue an exchange rate target, but consistently bases its monetary policy on its legal mandate. 

This mandate stipulates that “the SNB is required to ensure price stability, while taking due account of economic developments”. 

Starting in March 2009 the SNB intervened in currency markets. But after pumping in 15 per cent of GDP in May 2010 to little effect as the Swiss franc surged during the first round of the Greek debt crisis, it dropped the plan June 2010. 

These forays led it to a loss of SFr21 billion last year, its biggest ever, and its chairman, Philipp Hildebrand, has faced calls to resign.

Facing intense pressure from politicians and the export community, the SNB further intervened in the markets this year before announcing a floor exchange rate of SFr1.20 against the euro in September.  

Since then, the franc has hovered above that mark thanks to the SNB’s pledge to buy unlimited amounts of foreign reserves.

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