Sudip Bandyopadhyay’s Blog

If the world is really following the script of the 1930s, then we are due for competitive devaluations, as nations attempt to make themselves more competitive at the expense of everyone else.  So the Swiss National Bank’s announcement that it is intervening to push down the Swiss franc sounds alarming.  The speed with which the franc responded, dropping 3 per cent against the euro in a matter of minutes, also shows that if a central bank wants its currency to fall, it can deliver.  The problem is that not everyone can devalue at once – someone has to be left with an overvalued currency.  The SNB’s action does not necessarily herald such an outcome.  The Swiss franc, like the Japanese yen & US dollar , has been a “safe haven” currency, and thus had a perverse gain last calender year. Within inflation virtually zero already, an overvalued franc created a severe risk of outright deflation – something the SNB reasonably wants to avert.  As it also cut rates and said it would buy bonds, this move has more to do with attacking deflation than with boosting Swiss trade.  Indeed, a cheaper franc is good news for Eastern Europe.  Their consumers had indulged in the Swiss franc carry trade, taking out mortgages denominated in Swiss francs.  Since last July, the franc gained more than 50 per cent against the Hungarian forint, making those mortgages unbearable. Thus, if anyone can pull off a deliberate devaluation without sparking ugly consequences elsewhere it may be the Swiss.  But the precedent of a central bank attacking its own currency is disquieting. The falls in industrial production and world trade suggest that everyone on the planet would like a cheaper currency.  This even includes China, which has allowed its currency to gain 20 per cent on a trade weighted basis over the past four years, and seen its exports suddenly tumble.