Monday 18 December 2017

Alarm as soaring Swiss franc chokes exports

Klaus Wille

Switzerland's central bank has renewed its pledge to curb the "massively overvalued" franc that is now choking exports and harming the economy.

As the franc climbed over 5pc against the dollar and the euro yesterday, the bank said it was keeping a close watch on market developments and would take further measures to dampen the franc's value if necessary. It may be forced to resume buying back the currency for the first time in more than a year in a move that could burden it with billions of francs in further losses.

Officials led by Swiss National Bank president Philipp Hildebrand face a choice between allowing the currency to get even stronger or preventing it from further damaging the economy.

"They're caught between a rock and a hard place," said David Marmet, an economist at Zuercher Kantonalbank in Zurich.

"But at the end of the day, they might not have a choice."

The Swiss central bank unexpectedly cut its benchmark rate to zero from 0.25pc last week when Mr Hildebrand said the move "isn't meant to be symbolic" and that it was investor concerns about the euro region's fiscal crisis that was pushing the franc higher.

Rate cut

It hit a record 1.0075 against the euro yesterday, six days after the bank's surprise rate cut, before weakening to 1.0321. Against the dollar, the currency was at 71.98 centimes.

The currency is currently 43pc overvalued against the euro, based on purchasing power parity as measured by the Organisation for Economic Cooperation and Development.

Swiss companies face increasing pressure to cut costs to protect earnings. Daniel Frutig, chief executive officer of AFG Arbonia-Forster Holding AG, said on August 3 that the maker of heating technology was losing money every day.

ABB Ltd, the world's largest maker of power-transmission gears, has called the franc's ascent "challenging".

Switzerland's economy is already cooling. Consumers grew more pessimistic about the outlook and job prospects in July, the KOF economic indicator dropped to the lowest since February 2010 and investor confidence slumped.

The government held an extraordinary meeting on the franc on Monday and forecast growth to weaken over the coming months.

"More and more investors are parking their money in the franc," said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich.

"No economy on earth can cope with such a loss of competitiveness." (Bloomberg)

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