The Swiss franc devaluation

‘Economist’ has  a story on the Swiss National Bank (SNB) deciding to buy foreign currencies aggressively. It ends the story with these two paragraphs:

Back in the 1930s many countries had to choose whether or not to abandon the gold standard. Those that did so soonest tended to suffer least during the Depression. In these days of floating currencies, it is no longer necessary to announce a formal devaluation; benign neglect can allow the currency to fall. Some Europeans suspect this has been happening with the British pound.

But it is still a form of subtle protectionism, relying on someone else to take the strain. To raise the most worrying example, Chinese exports are down by more than a quarter from a year ago. What if the Beijing authorities decided that, in order to generate their targeted 8% economic growth, a bit of depreciation was required? After all, what’s good for the Swiss… [More here]

It is easy to answer the question they have posed. China has two trillion dollars worth of foreign exchange reserves accumulated over the years by intervening to smooth or hold down the value of the Chinese yuan against other currencies in the world. Switzerland has very little foreign exchange reserves, if at all. Hence, the starting points are very different.

Swiss banks have a lot of foreign currency assets. This move would raise the value of such assets. Second, it also mitigates the loan burden held by some of the residents of some C&EE countries in Swiss francs. This move on the part of the SNB has other positive pay-offs as well, thus.

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