(Currency) Wars and Peace

What’s happening in Switzerland?

Source: Wikipedia

Yesterday the Swiss National Bank announced they would no longer keep the Franc pegged to the Euro. The currency immediately jumped about 20%, roiling the markets. Some currency trading firms have been wiped out. They also lowered the deposit rates for banks to -0.75% to discourage inflows. Why did they do this?

The Swiss Franc has been pegged to the Euro since August of 2011. Lately, the Euro has been falling as markets anticipate a new round of quantitative easing by the European Central Bank. But it’s not just Europe: the Euro is falling; the Yen has been falling; the Russian Ruble has collapsed; there is speculation that the Swedes may cut rates; and collapsing oil prices have put pressure on the Norwegian Krona and Canadian Dollar.

The Swiss just declared that they are a neutral party in this currency war. The currency peg had required them to amass huge Euro balances—more than their entire economy. If the ECB expands Quantitative Easing, that will only increase. So the Swiss stepped away.

Source: Wall Street Journal

Their action only increases the turmoil in Europe. Switzerland may no longer be a “family estate” of the larger Euro-zone, but their economy is integrated with the rest of the world. If there really is a full-fledged currency conflict, there will be a lot of casualties.


Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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