The Swiss Try to Shed "Safety" Status for the Franc

By Dr. Duru written for One-Twenty

March 13, 2009


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The Swiss Franc has served as a safety currency off and on over the past two years as the global financial crisis has unfolded. The Franc surged against the dollar starting in 2007, peaking as Bear Stearns collapsed in March, 2008. After declining through November, the Franc surged even more sharply in December. The currency fell back against the dollar almost as sharply before it could reclaim 2008's highs. See the weekly chart for FXF below.

Swiss Franc: FXF
*Chart created using TeleChart:


Yesterday, the Swiss National Bank (SNB) confirmed that it is not interested in being a safe haven for the world's currency flows because "under the present circumstances, this represents an inappropriate tightening of monetary conditions." In its monetary policy assessment titled "Swiss National Bank takes decisive action to forcefully relax monetary conditions", the SNB dropped its interest rate target to 0.25%, declared that it will directly intervene in currency markets to prevent further appreciation of the Franc against the Euro, conduct additional repo operations, and buy corporate Swiss franc bonds. The SNB "...is seeking to counter the risk of deflation and of a dramatic deterioration in the economy" even as it revised downward its forecast for 2009 GDP to a contraction of 2.5-3.0%. The SNB move to quantitative easing continues a global trend toward currency debasement as a means to regain prosperity. It also generated some large and historic moves in the currency markets. The SNB's statement did not provide any price targets for its currency, but I decided to go bullish on the EUR/CHF pair and try to ride it upward from current levels (and gulping hard as I am no fan of the Euro given all the massive financial problems in Eastern Europe that loom over Eurozone banks).

It seems to me now that no single currency is "safe" when nations are desperate to dump their exports on the rest of the global economy to re-ignite their own growth. The U.S. dollar now stands even taller amongst shrinking currencies. But just as major export nations are eager to debase their currencies, the U.S. multi-nationals are suffering from adverse forex conditions. As the recession deepened last year, many companies proudly paraded how small their U.S. businesses were relative to their global businesses. I am sure they are regretting those shifts now. Unless the dollar resumes its multi-year decline, the pressure on the American consumer to save the global economy will increase even as that same consumer continues to retrench. I am not sure how much longer the dollar can retain its strength. I am tempted to reiterate that massive federal budget deficits spell inevitable doom for the dollar, but I am now caught wondering what currency could possibly take the dollar's place amongst the global mess (besides gold of course). It certainly will not be the Swiss Franc anytime soon...at least if the Swiss have anything to say about it.

Be careful out there!

Full disclosure: long EUR/CHF, GLD. For other disclaimers click here.

DR. DURU®, 2009