<TABLE cellSpacing=0 cellPadding=0 width=452 border=0><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published March 14, 2009
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Swiss move may spark competitive devaluations
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(London)
SWITZERLAND on Thursday broke a taboo among developed nations by trying to weaken its currency to help its economy, a policy that could trigger a wave of competitive devaluations if times get much harder.
At a time when governments around the world are struggling to resist protectionism, the Swiss National Bank (SNB) became the first central bank in the industrialised world to sell its currency as part of its fight against deflation. The SNB presented the move as one of a series of measures it is using now that its rates have hit rock bottom, but it is not the only nation to be grappling with this particular problem.
With interest rates in a race to the bottom around the world, others, such as Japan, are also looking for ways to help shore up their economies once they run out of monetary policy ammunition. 'The SNB have now fired the first formal shot in the forthcoming currency war,' said Chris Turner, head of forex strategy at ING Financial Markets. 'Countries around the world faced with the zero bound constraint may now feel it is acceptable to formally intervene to weaken the currency to ease monetary conditions.'
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</TD></TR></TBODY></TABLE>There is a big difference between a country the size of Switzerland intervening to manage its currency swings and the world's second-biggest economy doing the same thing. Still, G-7 finance officials in October 2008 effectively gave Tokyo the green light to intervene to weaken the yen, which was scaling 13-year highs against the US dollar - an offer Japan may feel inclined to take up were the yen to revisit such highs.
The Bank of Japan has already slashed rates close to zero, is buying corporate bonds to ease funding strains, and is also grappling with a strong currency at a time when exports are slumping and the economy is sliding deeper into recession.
The Swiss franc rose about 10 per cent in trade-weighted terms since July 2007, just before the financial crisis took a sharp turn for the worse, to the end of January. The yen has made even steeper gains, about 40 per cent between July 2007 to the end of February. And where Japan leads, others in the region and elsewhere could follow, for example China.
'It goes without saying that the SNB's action increases the likelihood that other countries will also engage in intervention in order to improve their competitiveness,' said Michael Klawitter, senior currency strategist at Dresdner Kleinwort in Frankfurt. -- Reuters
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</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Swiss move may spark competitive devaluations
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SWITZERLAND on Thursday broke a taboo among developed nations by trying to weaken its currency to help its economy, a policy that could trigger a wave of competitive devaluations if times get much harder.
At a time when governments around the world are struggling to resist protectionism, the Swiss National Bank (SNB) became the first central bank in the industrialised world to sell its currency as part of its fight against deflation. The SNB presented the move as one of a series of measures it is using now that its rates have hit rock bottom, but it is not the only nation to be grappling with this particular problem.
With interest rates in a race to the bottom around the world, others, such as Japan, are also looking for ways to help shore up their economies once they run out of monetary policy ammunition. 'The SNB have now fired the first formal shot in the forthcoming currency war,' said Chris Turner, head of forex strategy at ING Financial Markets. 'Countries around the world faced with the zero bound constraint may now feel it is acceptable to formally intervene to weaken the currency to ease monetary conditions.'
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The Bank of Japan has already slashed rates close to zero, is buying corporate bonds to ease funding strains, and is also grappling with a strong currency at a time when exports are slumping and the economy is sliding deeper into recession.
The Swiss franc rose about 10 per cent in trade-weighted terms since July 2007, just before the financial crisis took a sharp turn for the worse, to the end of January. The yen has made even steeper gains, about 40 per cent between July 2007 to the end of February. And where Japan leads, others in the region and elsewhere could follow, for example China.
'It goes without saying that the SNB's action increases the likelihood that other countries will also engage in intervention in order to improve their competitiveness,' said Michael Klawitter, senior currency strategist at Dresdner Kleinwort in Frankfurt. -- Reuters
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