sovereign-investor.com / By Sean Hyman / January 25, 2013
When you think of Switzerland, you might think of their famed Alps – or you might even think of the Davos meeting, or their Swiss banks.
However, when I think of Switzerland, I recall the one thing that has plagued them for the past five years – the relationship of the Swiss franc to the euro.
Until 2008, the euro gained on the Swiss franc and the Swiss were happy, because they are huge exporters of things like watches and chocolates.
Switzerland’s biggest customer is in the rest of Europe, and all those customers use the euro.
When the euro was gaining against the franc, Swiss goods seemed inexpensive to buy. But then came the financial crisis of 2008, and the EUR/CHF exchange rate began to plummet.
How the Swiss Have Suffered
It has been on that downward trajectory for five years now.
The euro got weaker and the franc grew stronger. Swiss exporters were crying the blues, because the rest of Europe could not afford their chocolates and watches as easily now.
So the central bank got to work. First, they tried to “talk their currency down” by making comments to the public that should have undermined the franc, but that didn’t work.
Then they took the next step, which was to intervene in the currency market by selling francs and buying euros. Of course, almost all currency interventions only work in the near-term; they almost always fail long-term.
So when individual interventions did not work, they decided to establish what some people refer to as a “peg” – although it was more of a “floor” at CHF1.20 per euro, and they didn’t want the exchange rate to drop below that.
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