Switzerland: A Tenuous Frontier

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By Rob Gelb

Of all of the countries engaged in a “currency war,” Switzerland is the one furthest out on the front lines. In mid-January, the country shocked investors by removing the franc’s peg on the euro in an unannounced decision. To weaken the franc and make its exports cheaper, the Swiss National Bank cut short term interest rates below -1%. As a response to the European Central Bank’s implementation of quantitative easing, the process may have worked too well. The benchmark index of manufacturing activity dipped to 48.2 last month, around 2.5 points below the expectations of many economists. An index under 50 signals an economic contraction. However, Switzerland may target a corridor rate for the franc at 1.05 to 1.10 per euro, in comparison to its value at 1.20 in mid-January.  Considering the worldwide race to the bottom, it seems that the Swiss is once again entering a battle it cannot win without hurting itself further.

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