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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
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