Swiss Franc: Is It Really A Safe Haven?

You might have thought eurozone politicians would welcome the latest phase of the currency union's rolling crisis. It's sent investors running for cover - to "safe haven" currencies like the Swiss franc, which hit a record high of EUR1.23 this week.

You'd think the politicians would thank even the worms and vultures of the financial markets, for helping to drive the single currency lower by selling it for dollars, sterling, yen and - of course - Swiss francs.

After all, they've spent years complaining the euro is too strong:

"The euro... is at too high a level," declared French president Sarkozy at a dinner in London in March 2008 - when the euro was at $1.60 - taking his cue from the Airbus aerospace giant's constant carping.

The euro needed "a strong[er] dollar" said eurozone central-bank chief Jean-Claude Trichet, 20 months later - with the single currency at $1.43.

In October 2010 - with the euro at $1.40 - the currency zone's finance-group chairman, Jean-Claude Juncker, got in on the act, declaring "the euro is too strong today".

And even at $1.30 - in January 2011 - Sarkozy still wasn't happy: "It is still too high," he said, again citing Airbus and vowing to beat "monetary dumping" during his presidency of the G20 economic meetings.

Now, at last, the "strong" euro is looking very weak indeed.

But what's this?

"The euro is too strong," according to European Union president Herman Van Rompuy, speaking in... May 2011.

With Greece, Ireland, Portugal and now Greece again lining up for injections of central-bank and taxpayers' cash, any further rate hikes by the "inflation vigilantes" of the European Central Bank would be suicidal (literally so if the executive plan any holidays to Greece or Iberia this summer).

Small wonder, then, that many euro holders have ditched them for the Swiss franc.

But is the Swiss franc really such a safe haven?

Investors might be forgiven for thinking so, given some of the hawkish comments flying around.

"The Swiss National Bank's hands are tied," reckons one forex trader interviewed by the Wall Street Journal. "They were heavily criticized for their [2010] interventions and so fresh interventions are very unlikely."

So that's that, then. There's to be no repeat of Berne creating Swiss francs and dumping them into the currency market. No more Swiss quantitative easing.

Well, not unless "the situation in the currency markets leads to deflationary risks," as SNB deputy-chief Thomas Jordan assured Swiss radio listeners recently. "Monetary policy must always respond to the inflation outlook," he repeated on Swiss TV's Eco show later the same day.

"If inflation risks are on the rise, we will have to raise interest rates more quickly," Jordan added. (That sloshing noise you can hear is yield-starved investors salivating the world over.) But "if the situation is such that inflation risks are low, then interest rates can stay low relatively long."

"Monetary policy rates will have to rise gradually from 2011 onwards to damp inflationary pressures from domestic demand growth," said the OECD, "but most importantly [wait for it...] to avoid overheating in the housing market." Hildebrand himself warned in April of "imbalances with serious repercussions" if interest rates stay at a "very low level for a long time." The month before, the SNB said real-estate prices deserved their "full attention".

Even the government has hinted that a rising Swiss franc might not warrant quantitative easing, Swiss-style, part deux. The SNB's forex intervention of spring 2009 to summer 2010 quadrupled the central bank's balance-sheet to $207 billion. (That includes the outright loss of $15 billion on selling the rising Swiss franc to buy a falling euro.)

But economy minister Johann Schneider-Ammann told business leaders at the recent Swiss Economic Forum in Interlaken that, "The strong franc is creating many concerns, but we have to learn to live with it, want to live with it."

Amid such talk of higher rates and a strong Swiss franc, one could easily forget that rates are still sitting at 0.25% per year. And Swiss savers might not even get to 0.50% if the nation's exporters get their way.

Total Swiss exports rose almost 10% in the first quarter from the same period last year. Machinery and electrical engineering sales leapt by 27%. But "many companies have already started to implement measures against the strong Franc," warns industry-group Swissmem's spokesman Ivo Zimmermann. "The renewed rise could prompt some companies to cut jobs or move investments out of Switzerland."

Switzerland's export boost will be taken as proof that soft money works... just as policy-makers in Italy, Spain, Portugal and Greece kept repeating throughout the 1970s, and then kept practicing for 20 years after.

Euro accession put a stop to that behavior (why do you think Britain kept the pound well out of monetary union?) but even the European Central Bank in Frankfurt must see the 21st century spin on the devaluation trick: If you want to roar back out of recession, make sure your money is soft.

Trouble is, everyone else wants a weak currency too. Or at least, everyone with their mitts on the levers and dials of monetary policy. Savers, retirees...even wage-earners - apparent beneficiaries of the Soft Money Consensus - are all beginning to wonder what good is inflation if your income doesn't inflate faster still.

"At full employment, a strong dollar is good for standards of living...But in a depressed economy, it isn't so clear that a strong dollar is desirable."

Yes, Christina Romer may not be chair of the president's Council of Economic Advisers anymore. But writing here in the New York Times, the Berkeley economics professor is still making plain Washington's aims.

"A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment.

Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while."

The US and Japan - both stuck at zero interest rates - show little sign of relinquishing the dubious honor of World's Softest Money. The equivocal, baby step rhetoric of the SNB - together with Swiss exporters' reluctance to give up the benefits of a weaker Swiss franc - suggest that we shouldn't expect Switzerland either to race away from the bottom just yet.

Discover the high security, low cost way to own gold - starting with your own free gram of Swiss bullion in our Zurich vault - by visiting BullionVault today...

Adrian Ash runs the research desk at BullionVault. Formerly head of editorial at Fleet Street Publications - London's top publisher of financial advice for private investors - he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to a number of investment websites.

About the Author
Adrian Ash

Adrian Ash runs the research desk at BullionVault. Formerly head of editorial at Fleet Street Publications – London's top publisher of financial advice for private investors – he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to a number of investment websites.

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