Swiss Franc Returns to Glory

July 26, 2011

Currencies that perennially appreciated were known as “hard currencies” in the early days of floating exchange rates, and the Swiss franc was the king of the hard currencies.  No other currency could match it stride for stride, and Swiss officials at times implemented extraordinary measures to contain that power, even for a while imposing negative interest rates.

The dollar, which served as the lynchpin of the international monetary system after World War Two, was not a hard currency.  It had an average value of 4.2144 Swiss francs in 1968-72 but just CHF 2.6893 in the following five years to 1977 and CHF 1.4182 in the sequential five years through 1982.  In period average terms, the franc had climbed 56.7% between 1968-72 and 1973-77 and an additional 89.6% between 1973-77 and  1978-82.  Comparatively low Swiss inflation was a major force behind the franc’s strength in that golden era.  The table below compares December-over-December CPI inflation in 1974-1981 using the data reported initially.

CPI, Dec-on-Dec Switzerland United States
1974 7.6% 12.2%
1975 3.4% 6.9%
1976 1.3% 4.8%
1977 1.1% 6.9%
1978 0.7% 9.1%
1979 5.2% 13.3%
1980 4.4% 12.1%
1981 6.6% 8.9%

The Swiss franc lost its extreme luster over the next twenty years.  It performed decently but no longer was a hare in a race of turtles.  The dollar averaged CHF 2.0398 in 1983-87, CHF 1.4664 in 1988-92, CHF 1.3432 in 1993-97 and CHF 1.5784 in 1998-02. 

Lately, however, the franc has appeared to be revisiting its best years, only vastly diverse inflation is not a background factor this time.  At 1.2575 per dollar on average in 2003-07, the franc was 25.5% stronger than in 1998-02.  It has averaged 1.0418 per dollar since the start of 2008 and touched a record high of 0.7998 per USD today.  That level was 57.2% higher than its mean dollar value in 2003-07.

The common link between the 1970s and early 1980s and present times is that investors both then and now fear that it’s the end of the world as we know it.  They worried then that the United States was on a path to hyperinflation and are dismayed now to see what appears to be a broken government in the United States and the euro area.  Former Fed Chairman Volcker was the white knight who conquered inflation.  Who, if anyone, will serve that role now?  As markets watch events beyond their control unfold, the Swiss franc is again experiencing very popular investor demand.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.