FT Lex 99-07-03

Has the Swiss franc lost its reputation as a safe haven currency? It has fallen by more than 12 per cent against the US dollar since the start of the year and at SFr1.57 is at its lowest level in nearly a decade.

It has also lost ground against sterling and the Japanese yen. Of the big currencies, it has only managed a modest strengthening against the poor old euro.

The Swiss are terrified that a weak euro could trigger big currency inflows into the country. But despite the weakness of the new single currency, there has been no sign of a rapid widening of interest rate spreads that would signal a fight into the Swiss franc.

One reason is that non-Swiss investors can earn twice as much on US government paper. The Swiss National Bank has also made it abundantly clear that it does not intend to repeat the mid-1990s mistakes which plunged the Swiss economy into its deepest recession since the 1930s.

However, the SNB is steering a tricky course. Swiss interest rates, at 1 per cent, cannot go much lower and an unemployment rate of 2.7 per cent is a reminder that there are limits to the generosity of its monet tary policy. if the forex markets had t accepted that the SNB’s policy is to shadow the euro, then the 150 basis point gap between Swiss and euro interest rates should have disappeared.

The fact that the gap is still there n suggests that the Swiss franc has not, after all, shed its “safe haven” image. All this year’s currency gyrations have shown is that the Swiss franc is more likely to be the beneficiary of a weak dollar than a weak euro.

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