Pegged against the euro, the Swiss franc has lost its status as an isolated safe haven currency, a fund manager says.
Investors had been buying the Swiss franc amid the uncertainty surrounding the global economic environment, making it one of the world’s most expensive currencies and prompting the Swiss National Bank to intervene.
Earlier this week the bank therefore announced it would no longer allow one Swiss franc to be worth more than €0.83. This move is intended to protect Switzerland’s domestic economy because its appreciating currency has had an adverse impact on the corporate sector.
Thanos Papasavvas, the head of fixed income and currency strategist at Investec Asset Management, says the decision is “bold, but reasonable and understandable”.
Papasavvas predicts the bank will succeed in maintaining the rate, but warns the Swiss franc may no longer represent an isolated safe haven currency at its current levels against the euro.
Compared to its pre-financial crisis levels, the Swiss franc has appreciated 40% against the euro, 45% against the dollar and 54% against the British pound. It is the world’s strongest currency year to date, up 16% against the dollar.
“In many ways the emerging market currencies have been the major beneficiaries of the recent crises as their fiscal prudence, monetary discipline and political transparency have led the asset class to become a structural rather than a cyclical story,” Papasavvas says. “We have also already seen the Norwegian krone appreciating and yields falling as a result of a proxy to the [Swiss] franc within Europe.”
Previous interventions have been costly both in monetary and political terms.
©2011 funds europe