Investopedia's Forex Outlook For May 2012: Swiss Economy
Switzerland: Franc-ly It's a Challenge
Switzerland's economy has proven very robust throughout the global economic crisis. But this very fact has led to immense pressure on the Swiss franc. Investors looking for a safe-haven currency have flocked into francs, driving up its valuation over the past few quarters. And despite a cap on its exchange rate, traders have started pushing the boundaries recently. The upward pressure on the Swiss franc may be great for Switzerland's consumers, who are able to buy goods around the world for cheaper. But the higher valuation is bad for exporters, who have struggled to remain competitive in the global marketplace. This has led to a sharp hit to the country's exports and a marginal hit to its overall GDP growth.
SEE: The Importance Of Inflation And GDP
Committed to Defending the Rate
The Swiss National Bank (SNB) signed a new chairman, Thomas Jordan, on April 18. The move ended some uncertainty surrounding the bank's resolve to defend its 1.20 euro exchange rate ceiling with the euro. According to the new chief, "The minimum exchange rate is absolutely essential for the current economic situation."
The move comes after traders have been testing that level in the forex markets. Whether or not another breach occurs remains to be seen, but many economists suggest that the Swiss franc may be significantly overvalued. And as a result, the currency may fall when the global economy begins to see a more durable recovery.
Despite the Swiss franc's high valuation, many areas of the economy remain quite healthy. The IMF's recent World Economic Outlook recently projected that Switzerland's economy would strengthen in 2013. While the outlook is slower than its estimates in September, the organization sees 0.8% GDP growth this year and 1.7% growth in GDP during 2013.
Still, some trade groups have been calling for the currency peg to be dropped to 1.30 euros. In particular, exporters and the tourism industry have been facing the biggest problems with the higher valuation. Trade unions covering these sectors have been campaigning for the drop, which is unlikely to be seen unless the overall economy deteriorates.
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