Note to Strong Dollar Advocates: Take a Lesson from the Swiss Before You Restate Your Position

But Only If You Are Capable of Learning a Lesson

The U. S. politicians, usually those outside of government can usually be counted upon to rail against the weakening of the dollar and promise to support a “strong dollar”.  Well Switzerland has a “strong” and strengthening Swiss France.  How’s that working out for them?

On Tuesday the Swiss National Bank (SNB) took what is unprecedented action to weaken the Swiss Franc.  Yes, action to weaken the currency.

The Swiss National Bank stunned financial markets on Tuesday by setting a ceiling for the Swiss franc against the euro in an attempt to prevent the strength of its currency from pushing its economy into recession.

What the SNB decided to do was to buy Euro’s at an exchange rate of 1.20 to the Swiss Franc.  This will support the Euro at that price, as nobody will sell Euro’s for less than 1.20 Swiss Francs when they can sell them to the SNB for 1.20 Swiss Francs.

Normally a country is supporting their currency in international monetary policy, mostly to keep it from falling.  To sell a currency to support a foreign currency at a specific level may have been done before, but if so nobody remembers it.  The SNB is in a position to suffer huge losses if it cannot sustain the program, because it will end up with a bunch of Euro’s it bought for 1.20 SF that would be worth less than 1.20 SF.

So what is going on here?  See a strong currency means a rise in the prices of exports and a fall in the prices of imports, which doesn’t help an economy that is not suffering from inflation.  So the strong currency is hurting the Swiss economy and thus they are going to weaken it.

“The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc,” the central bank said in a statement.



A Strong Fellow Gets the Girl
A Weak Currency Gets the Economic Growth



Much of the problem here is terminology.  The term “strong dollar” sounds good and “weak dollar” sounds bad.  Maybe if the terms were replaced with “competitive dollar” for weak dollar and “non-competitive dollar” for strong dollar the discussions in the U. S. would be more rational.  Of course that would require politicians to be more rational, which is a much harder hurdle to overcome.