Good Essay On Why The Franc Was Unpegged

Article Summaries

There was panic on 15th January when the Swiss National Bank made it clear that it was not going to hold the Swiss Franc any longer at an exchange rate in relation to the euro. This led to the appreciation of the franc such that the exchange rate of Euro to Swiss franc was 1.2. In 2011, the financial markets around the world were not doing well, and this was when the exchange –rate peg was introduced into the market by SNB. The American government bonds and the Swiss franc are very popular with investors since they believe that they cannot go wrong with the investments. The Swiss government is known for its efficiency in running a balanced budget, a factor that made investors flock to the franc raising its value. However, the high value of the franc is a loss to the Switzerland economy that mainly relies on exports. In order to contain the situation, the SNB made new francs so that it would be able to buy Euros. The increase in supply of francs in relation to Euros in the foreign exchange markets led to the decrease in the value of francs.
The Swiss citizens are angry with the printing of the money, claiming that it may lead to hyperinflation, a factor that has made the SNB drop the cap. In addition, the European central bank is expected to introduce quantitative easing where the euro-zone countries will be allowed to create money y to buy government debts. Further, the SNB decision was driven by the fact that the euro depreciated last year leading to a depreciation of the franc that was pegged to the euro.

Reasons for the Currency Volatility Getting Worse

The volatility of foreign currencies has been high in the past years. The Swiss franc, for example, increased by 30% within minutes last month while the Russian ruble has depreciated by 40% against the dollar over the past one year (Buttonwood 10). The Australian and Canadian dollar has also been affected by the volatility, dropping to six-year lows against the greenback. The currency volatility has made business in the foreign exchange markets costly to an extent that the Everest capital had to close its main hedge fund owing to huge losses it incurred. One of the reasons why the volatility has been high is the division between the Federal Reserve and the two major central banks in the developed world, the Japan and European central banks.
The other reason for the currency volatility is the falling prices of commodities that bring inflation down. This has weakened the economy of various countries especially these that rely on exports such as Russia. Many central banks including the Australia’s and Canadian have resolved to cut the interest rates since November last year. Low-interest rates make the currency unappealing to international yield-seeking investors thus reducing its value. But the move is expected to lower the value of the currencies and with the lower exchange rates, the exports may be boosted. The volatility becomes even worse in cases where a currency is pegged on another. For instance, Denmark whose currency is pegged to the euro has reduced its interest rates thrice in the past weeks to ensure that there are no capital flows that might increase the value of its currency. Pegging is a popular way of reducing the volatility of currencies but must be monitored adequately.

Works Cited

W, C. "Why the Swiss unpegged the franc." The Economist 18 Jan. 2015: n. pag. Print.
Buttonwood. "Why currency volatility has got worse." The Economist 3 Feb. 2015: n. pag. Print.