The Currency That Just Won’t Quit
February 7, 2011 by admin
Filed under News Stories
February 7th, 2011
CNNMoney.com
By: Charles Riley
The Swiss franc, one of the world’s strongest currencies, has been on a tear in recent months, and is now flirting with a new all time high against the U.S. dollar.
The Swiss currency has spiked more than 20% against the dollar since June, when Europe’s sovereign debt crisis sparked a flood of money into the franc amid worries about the unfolding crisis.
The currency might continue to move sharply higher, due to concerns that violence in Egypt might destabilize the region.
“What is driving the flow is a safe-haven bid, and the Swiss franc has been bought aggressively due to the situation in Cairo,” said Kathy Lien, director of currency research for Global Forex Trading.
That’s the same way traders usually talk about the U.S. dollar. But that might be old news. The market is treating the franc like a modern-day Maginot Line against geopolitical upheaval.
“The dollar used to be a safe haven,” said Lien. “And still is to some degree, but not like the franc.”
Europe debt woes take a vacation
What has changed? For one, investors are skittish about the amount of debt that is being carried by the U.S. federal government. If rating agencies were to downgrade U.S. debt, the implications would be enormous for the dollar.
And the U.S. economy just isn’t recovering quickly enough for investors to feel confident. “There is still an extreme amount of spare capacity in the U.S. economy,” Lien said.
But why Switzerland?
“The Swiss franc is seen as in independent island in the middle of very stormy seas,” said Brian Dolan, chief currency strategist at Forex.com.
Switzerland, unlike many other countries in Europe, has a relatively low debt level, and its economic recovery has outpaced that of the United States.
“They didn’t have quite as large a downturn there. Whereas the U.S. saw 5% to 6% contractions in GDP, the Swiss only had 3%,” said Dolan.
Track currency rates
But having a strong currency isn’t always a good thing. For one, Swiss products will become more expensive for other countries to buy. And that has the Swiss government very worried.
In the wake of the global recession, the Swiss central bank has intervened in the currency market, hoping to stem the franc’s prolonged rally and protect the country’s export business.
