Swiss Finance: Capital Markets, Banking, and the Swiss Value Chain

CHAPTER 6

Swiss Francs in the Global Exchange Markets

INTRODUCTION

Switzerland is relatively small compared to other nations with much larger populations and GDPs, but it punches far above its weight class in the international currency markets. The Swiss franc has earned a well-deserved reputation for its safety and reliability during times of international turmoil but, even under normal conditions, the volume of Swiss-franc turnover in the foreign exchange markets is impressive. On the surface, the Swiss franc's distinction as a safe-haven currency might appear to have unequivocal advantages but, in reality, it carries a particular set of disadvantages, as well. One of them relates to the Impossible Trilogy, which concludes a nation with open trade and capital markets must choose between a fixed exchange rate and autonomy over its money supply—it cannot have both. In 2011, this issue came to a head as the Swiss franc's value soared, causing the Swiss National Bank (SNB) to fix its value relative to the euro in order to shield the nation from deflation and protect domestic export industries. Given the size and speed of international capital flows, there was fear that the central bank's new policy would surrender or weaken its control over the domestic money supply.

This chapter puts the size, structure, and history of the Swiss-franc market into international perspective. It shows how steady appreciation of the nation's real exchange rate during the past 50 years has forced domestic ...