Dollars and Jens
Wednesday, June 13, 2012
Swiss Currency Manipulation
In case you don't know the back story, a lot of people with euros have recently been inclined to trade them for Swiss francs. This has increased the value of the franc to the point where, a couple of months ago, the Swiss National Bank declared that they would henceforth buy as many euros as people wanted to sell them at a price of 1.2 francs each. Here's what I found interesting:
Last Thursday, the central bank reported that the value of its international currency reserves surged by 66.2 billion Swiss francs ($69 billion) in May to CHF303.8 billion. To put that in perspective, the increase was 1 1/2 times the size of Switzerland's monthly GDP.As the article points out later, some of this could well be due to currency appreciation - the Swiss bank didn't sell 66.2 billion francs in May - but it seems likely that the bank created currency more valuable than the entire real product of the country. The author of the article insists that the bank will be unable to sustain this, but note the difference between this and the failure of the Bank of England to prop up their currency 20 years ago: when a central bank wants to prop up the price of its currency against market movements, it has to give up foreign currencies (or at least some kind of assets) to buy their currency. When it runs out of foreign reserves and start selling the furniture, this becomes tricky. On the other hand, if the Swiss bank believes the demand for their currency is temporarily inflated -- either because the euro is being undervalued or because holders of euros are right to flee the euro but are disproportionately preferring the franc to other alternative assets -- they can create as much supply as they want to. They do face some currency risks -- if they keep their proceeds in euros and the euro collapses, they will face problems if they later wish to pull the new francs off of the market. But if they can diversify their assets into whatever mix of assets they actually want to maintain the value of the franc with respect to, they should be fine.