World Economy

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World Economy



Bowing to the inevitable, Switzerland has ditched an increasingly expensive policy to limit the export-sapping rise of the Swiss franc — a decision that propelled the currency a whopping 30 percent higher against the euro within minutes.

Thursday's decision by the Swiss National Bank, or SNB, to end its efforts to keep the euro from trading below 1.20 francs came amid mounting speculation that the European Central Bank will next week back a big stimulus program that will put more euros in circulation, which would further dilute their value.

That expectation has seen the euro face intense selling pressure in currency markets, particularly against the dollar. The euro has fallen to nine-year lows against the dollar and below its launch rate in 1999.

Swiss franc booming

As the outlook for the euro has darkened, the cost for the Swiss central bank of defending the peg by buying euros or selling francs has risen. Though the timing of the Swiss decision proved a surprise, most foreign exchange experts thought the peg would have to be abandoned, just as previous such efforts had.

The scale of the Swiss central bank's task was evident in the franc's movements in the markets after it abandoned the peg. In some of the most dramatic moves seen in currency markets for decades, the euro plunged a stunning 30 percent against the franc in the minutes after the decision. It has since recovered somewhat to trade 13 percent lower at 1.04 francs.

It wasn't just the euro that got caught up in the franc's frenzied moves. The dollar plunged by a similar amount, though it also recouped some of its kneejerk losses to trade 15 percent lower 0.8884 francs.

 Why is this happening now?  Will it impact Greece?

montrealer58 montrealer58's picture

Simplistically, we can look at it as the exit of one of the major buyers of the Euro, as the Swiss had to buy Euros (sell Francs) to keep the Franc down. This in turn will tend to mean the Euro will trade lower without a raise in interest rates in that area. 

If you have a lot of debt denominated in a given currency, it is probably to your advantage if that currency is somehow discounted, especially if you have the ability to earn other currencies it trades against.

What would be bad for Greece would be a rise in Euro interest rates. What would not be so bad would be a fall in the Euro.


Thank you for your response Montrealer. I just realized I should have put this in the World Financial Crisis rather than creating a new thread so I will put my post there and hope this one dies.