Why The Swiss Decided To Cut Links With The Euro

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Panic in the foreign exchange markets followed the sudden decoupling of the Swiss France from the Euro.

Hedge funds, forex speculators and stock markets all suffered as a result of the measure.

English Premier League football club West Ham shirt sponsors Alpari, a retail currency exchange, announced going into insolvency after suffering massive losses – but has backtracked on the statement and is reportedly in negotiating a rescue bid from New York listed FXCM.

FXCM took a $225 million quick loan fix to cover losses, the firm said over the weekend.

Neither company is commenting on the speculation.

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No longer a safe haven

Meanwhile, West Ham reckons the move has cost them £650,000 in lost sponsorship.

So why did the Swiss take the decision quickly and quietly?

For a country renowned for financial prudence, decoupling from the Euro was out of character.

The problem for the Swiss was in 2011, the Swiss franc value was pegged with the Euro when foreign currencies around the world were in chaos.

For investors, the Swiss franc was a ‘safe haven’ currency considered less risky than other currencies.

But as money flowed into the Swiss franc from overseas, the value was pushed up while the value of the Euro was falling.

To compensate, the Swiss central bank presses were running hot printing more francs to push the value down.

Exchange rate tinkering ends in tears

However the value of all these extra francs floating around totted up to more than 70% of GDP.

This made Swiss exports more expensive and the cost of tourism has risen as switching from Euros to francs left Europeans paying much more for their winter holidays.

It may be the Swiss have got wind of the European Central Bank’s decision expected later in the week to start a quantitative easing program which will push down the value of the Euro even more.

The Swiss National Bank has reviewed growth figures for the year and forecasts an improvement of just 0.5% against a predicted 1.8% before the decoupling.

One key, highlighted by The Economist magazine is 20% of Swiss exports go to the US and India, and as a result of decoupling, prices of goods and service are a lot more attractive to these important markets.

The lesson, argues The Economist, is that tinkering with exchange rates always ends in disaster because a central bank cannot control what goes on outside its sphere of influence – in this case stagnation in the Eurozone.

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