The Global Economy in Turbulent Times

CHAPTER 74 Tension over Exchange Rates¹

Amid heightened fears over eurozone sovereign debt risks and increasing concerns about the health of the United States and eurozone economies, worried investors have flocked to the safety of haven currencies, especially the Swiss franc (CHF), and gold. While investors and speculators have since moved aggressively to buy gold, the switch from being large sellers to buying by a number of emerging nations’ central banks (Mexico, Russia, South Korea, and Thailand) has helped propel the price of gold more than 25 percent higher this year, hitting a record US$1,920 a troy ounce earlier this month. At a time of high uncertainty in the face of the International Monetary Fund’s (IMF) latest gloomy forecast of global growth, few central banks relish the prospect of a flood of international cash pushing their currencies higher. Massive overvaluation of their currencies poses an acute threat to their economic well-being, and carries the risk of deflation.

The Swiss Franc

Switzerland’s national currency, the CHF, should be used to speculative attacks by now. So much so that in the 1970s, the Swiss National Bank (SNB) was forced to impose negative interest rates on foreign investors (who have to pay banks to accept their CHF deposits). And, it has been true in recent years, with the CHF rising by 43 percent against the euro since the start of 2010 until mid-August this year. There does not seem to be an alternative to the CHF as a safe haven at the ...