Rolexes Just Got More Expensive -- Or, You Can't Keep a Good Currency DownCommentary by Bob McTeer
January 15, 2015
Switzerland’s central bank surprised the world this morning by removing its self-imposed cap of 1.20 Swiss francs per euro and letting the franc float higher. It also lowered its deposit rate for banks to -0.75 percent to discourage inflows of bank funds into the Swiss National Bank. Yes, that’s minus 0.75 percent. (The comparable Federal Reserve rate is +0.25, resulting in a 1 percentage point differential.)
What to make of this? The Swiss franc had been tied to the Euro since the cap was imposed a couple of years ago and as the Euro has plummeted in value recently. But, unlike the 19 members of the Euro zone, the Swiss tie was not written in stone. Apparently, the timing of the divorce was hastened by the prospect of a new program of euro-weakening quantitative easing that Mr. Draghi has hinted will come at the ECB meeting on January 22. Of course, Mr. Draghi has hinted at such as that before only to fail to follow through. A recent legal ruling in Europe removed one obstacle to final action.
I applaud the Swiss move back to flexible exchange rates for all the reasons that Milton Friedman made famous. However, they might have done it more quietly and with less potential for disruption if they hadn’t waited for so much pressure to build up. I’m reminded of my mother’s old fashioned pressure cooker when I was little. It had three rings that pushed up from the top as the pressure built to what I was taught were dangerous levels. I expected the thing to explode after the third ring. I don’t think the Swiss mind loud noises, however. I once attended a Davis Cup tennis match between the U.S. and Switzerland, and the Swiss fans drove me crazy with their loud cow bells. As it turned out, the franc jumped only about 15 percent initially—an amount that should be easily digested by the markets.
This brings me to an editorial comment that the world is playing with matches with all the things going on with exchange rates. We hear daily talk of the strong dollar these days, and how much stronger it can get before doing serious harm to our exporters. The truth is that most of the dollar strength is just the other side of deliberate currency weakness in Europe and Japan and currency declines in commodity.