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If the Swiss central bank were able to increase the valuation of the €-Mark relative to the currencies of our trading partners, it would have a deflationary effect.

But (a) simply defending the existing exchange rate is neither inflationary nor deflationary and (b) they can't seriously affect our trade-weighted exchange rate even if they were to try. The Swiss Franc simply isn't a big enough currency. Any Franc/€-Mark exchange rate movement large enough to appreciably influence the Eurozone trade-weighted exchange rate is also large enough to cause politically unacceptable dislocations in Switzerland. And since the Swiss Franc is the currency under upwards pressure at the moment, the Swiss CB can always curtail such disruption.

It will be more interesting to see what happens if the Swiss CB fails to use the current upwards pressure to accumulate sufficient hard currency reserves to cover the inevitable exit from the Swiss Franc when the immediate panic subsides. Because then they will be defending against a potentially substantial depreciation of their currency.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Aug 12th, 2011 at 05:48:55 AM EST
[ Parent ]
People aren't buying the Swiss Franc because it's a groovy thing to do.  They are buying it for a perceived benefit which, in turn, can be measured or valued.  So the question becomes what, exactly, ARE they paying for that benefit?

Cutting to the chase: not much.  Certainly they are not paying the full price for the benefit although the Swiss economy is paying the full cost of the benefit.  Which argues the Swiss Franc is being bought below the (cost of production + profit) at this time, in these market conditions.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Aug 12th, 2011 at 01:52:08 PM EST
[ Parent ]

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