The Swiss franc seems well placed to benefit if currency wars turn into trade wars
‘Currency wars’ – deliberate attempts to weaken exchange rates through direct foreign exchange intervention, or indirectly through loosening domestic monetary policy or imposing capital controls – have the potential to turn into ‘trade wars’ if countries start imposing tariffs on imports.
This would increase risk aversion to the benefit of the safe-haven dollar, yen and Swiss franc. But since the US economy is dependent on capital inflows to finance its current account deficit at prevailing exchange rates, and Japan’s economy is heavily dependent on exports for growth, the Swiss franc may be better placed than the US or Japanese currencies if the global economy were hit by the ‘black swan’ of widespread protectionism.
Like Japan, Switzerland has ample foreign exchange reserves to defend its currency, following the Swiss National Bank’s efforts last year and this year to curb the strength of the Swiss franc through buying foreign currency, as shown in the chart above.
Like Japan, Switzerland is also a significant net exporter. So if the world economy were to fall prey to trade wars, the Swiss economy would be hurt by declining exports. But unlike Japan, Switzerland’s economy is less dependent on trade for growth. As the right-hand chart above shows, Swiss GDP growth, like German growth, has been strong in 2010, easily outpacing the Eurozone. This is because Switzerland’s domestic economy has not suffered excessively from the credit crunch, as local banks have continued to lend. Thus, in the event of
widespread protectionism disrupting global trade, Switzerland may still be able to rely upon domestic demand to help keep its economy afloat.
In contrast, Japan’s heavily reliance on exports suggests Tokyo would be much quicker to respond to serious trade frictions by resorting to intervention to weaken the Japanese yen. That would reduce the yen’s safe-haven appeal. Similarly, for the world’s other main safe-haven currency – the US dollar – concerns that foreign central banks could stop buying US Treasuries if the US were to impose trade tariffs would reduce the appeal of the greenback.
‘Currency wars’ – deliberate attempts to weaken exchange rates through direct foreign exchange intervention, or indirectly through loosening domestic monetary policy or imposing capital controls – have the potential to turn into ‘trade wars’ if countries start imposing tariffs on imports.
This would increase risk aversion to the benefit of the safe-haven dollar, yen and Swiss franc. But since the US economy is dependent on capital inflows to finance its current account deficit at prevailing exchange rates, and Japan’s economy is heavily dependent on exports for growth, the Swiss franc may be better placed than the US or Japanese currencies if the global economy were hit by the ‘black swan’ of widespread protectionism.
Like Japan, Switzerland has ample foreign exchange reserves to defend its currency, following the Swiss National Bank’s efforts last year and this year to curb the strength of the Swiss franc through buying foreign currency, as shown in the chart above.
Like Japan, Switzerland is also a significant net exporter. So if the world economy were to fall prey to trade wars, the Swiss economy would be hurt by declining exports. But unlike Japan, Switzerland’s economy is less dependent on trade for growth. As the right-hand chart above shows, Swiss GDP growth, like German growth, has been strong in 2010, easily outpacing the Eurozone. This is because Switzerland’s domestic economy has not suffered excessively from the credit crunch, as local banks have continued to lend. Thus, in the event of
widespread protectionism disrupting global trade, Switzerland may still be able to rely upon domestic demand to help keep its economy afloat.
In contrast, Japan’s heavily reliance on exports suggests Tokyo would be much quicker to respond to serious trade frictions by resorting to intervention to weaken the Japanese yen. That would reduce the yen’s safe-haven appeal. Similarly, for the world’s other main safe-haven currency – the US dollar – concerns that foreign central banks could stop buying US Treasuries if the US were to impose trade tariffs would reduce the appeal of the greenback.
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