Swissy Zeroing in on Par Against the Euro

August 9, 2011

The franc got as strong today as 1.0071 per euro.  Not only was that a record high, but it constituted a leap of a shade over 51% from this relationship’s lifetime average.  The euro, which has only been around for 11 years and seven months, has posted an average value over the whole period of 1.5227 francs and was as strong as CHF 1.6825 back on October 11, 2007 in the early days of the world financial crisis.  From March through mid-December of 2009, Swiss National Bank officials utilized intervention to keep the franc trading on the weak side of 1.50.  In these challenging economic times, that level is where the authorities would prefer the franc, but they are unprepared to subordinate control of the money supply and thereby jeopardize long-term price stability to enforce an exchange rate target.

The give-and-take between efforts to limit franc appreciation and to retain triple A credibility as an inflation fighter has a longer history than the period since the common currency came into existence.  The benchmark for gauging the franc’s strength used to be the D-mark, a hard currency in its own right.  In 1970 when dollar exchange rates were fixed, a dollar was worth 4.373 francs, and the Swissy’s D-mark cross was 1.1991 francs per mark.  In the fifteen ensuing years to 1985, the franc moved to and beyond par against the mark, rising some 45% in all, or 2.5% per annum, to an average value of 0.8256. 

That level proved then to be near the limit of what Swiss officials would tolerate, and they were pretty successful at maintaining low inflation and a stable value versus the German currency for the remainder of the latter’s existence.  At the end of 1998 when the euro replaced the mark and ten other Continental European currencies, 0.8238 francs exchanged for one mark and for 1.6112 euros.  ECB President Trichet boasts that the ECB has done a better job of maintaining its inflation target than the German Bundesbank, but the euro has proven to be an easier prey for the franc to conquer than the mark was.

In these ultra-risk averse times, however, the franc is golden, literally.  An appreciating trend resumed in 2008, and after piercing the 1.50 per euro level in early 2009, central bank officials weakened it back to that threshold in March of that year and kept it on the weak side of 1.50 until December.  The franc ended 2010 at 1.2481 per euro.  It advanced just 2.3% additionally in the first half of 2011 to 1.2199/EUR but has been on a tear this summer, gaining 21.1% by today’s earlier high of 1.0071.  Altogether since the birth of the common currency, the franc has climbed at a pace of 3.6% per annum against the euro.

The franc also touched 0.7066 per dollar today, a 519% advance from its fixed rate of 4.373 in 1970.  That works out to a 4.5% per annum average appreciation over slightly more than four decades.  As impressive as that gain is, it’s been exceeded twofold by gold, which appreciated from $35 per ounce in 1970 to $1738.30 now, a gain of 10.0% per annum.

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

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