WHEN the going gets tough, the tough buy Swiss francs. That was true in the 1970s, when the Swiss were forced to impose negative interest rates on foreign depositors. And it has been true in recent years, with Switzerland's currency rising by 43% against the euro between the start of 2010 and mid-August this year.
The Swiss National Bank (SNB) has decreed that it will target an exchange rate of SFr1.20 to the euro, a policy that it will apply with “the utmost determination” by being “prepared to purchase foreign exchange in unlimited quantities”. The announcement had its intended result, driving down the franc by 8.2% within minutes to the targeted level (see article ). Central banks have much greater scope to push down their currencies than they do to prop them up; whereas the Bank of England had to deplete its foreign-exchange reserves defending the pound in 1992, the Swiss can create francs without limit.
This newspaper is not generally in favour of policies that distort markets, but the Swiss deserve some sympathy. More orthodox measures aimed at limiting the franc's rise have proved ineffective. The Swiss currency has been an innocent bystander in a world where the euro zone's politicians have failed to sort out their sovereign-debt crisis, America's economic policy seems intent on spooking investors and the Japanese have intervened to hold down the value of the yen. The Swiss franc has looked like the only paper currency that could act as a safe haven; a kind of Alpine gold.
Our rough-and-ready Big Mac index calculated in July that the franc was as much as 98% overvalued against the dollar. This has been causing problems for Swiss companies: several have recently released profit warnings and some have talked about moving operations out of the country. This is definitely not a case of a country trying to steal a march on its trade competitors by holding its currency at an artificially cheap level.