Strong franc threatens homespun manufacturing

The Swiss franc: worth more today than yesterday Ex-press

Manufacturers are shifting a greater share of investments out of Switzerland with the dollar in the doldrums and the euro plunging to record lows against the franc.

This content was published on May 29, 2011 - 10:17

Renewed fears that Greece might default on its debts has sparked a fresh wave of euro weakening while the dollar continues to trade way below parity against the franc. A single euro cost just under SFr1.22 on May 27 and the dollar just SFr0.85.

Swiss exporters are used to the safe haven franc gaining in strength in times of global economic uncertainty. But the speed of exchange rate fluctuations this time has hindered their efforts to dampen the effects of Swiss goods becoming more expensive in other countries.

Despite orders and sales increasing, margins are taking a hit, forcing many companies to not just source materials in the eurozone, but to also start buying more equipment outside Switzerland.

“If things do not improve we fear that whole production lines will be relocated abroad in the mid-term,” Ivo Zimmermann, spokesman for the Swissmem umbrella group of the mechanical and electrical engineering sectors, told

“If that were to happen then it would obviously have a negative impact on job creation in Switzerland.”

Intervention failed

Already in February, Swissmem was warning that the worst consequences of the strong franc were yet to hit companies. The delayed effects of steadily deteriorating conditions could force some firms to go bankrupt, Swissmem warned at its annual news conference.

Since then, the franc has gained yet more ground against the euro and the dollar – the currencies of its two largest trading blocs.

Thomas Jordan, vice-president of the Swiss National Bank (SNB), said this week that he was “very concerned” about the latest developments.

Although the SNB stands poised to intervene in the foreign exchange markets should the franc’s appreciation threaten deflation in Switzerland, previous efforts in this direction had only met with limited success given the size and scale of the forces affecting exchange rates.

Greek tragedy unfolding

The latest fears that Greece would be unable to pay back its debts, despite a massive bailout from the European Union, has caused many investors to flee equity markets in favour of cash holdings in the franc, according to Julius Bär currency expert David Kohl.

“Renewed speculation about Greece failing to service its debts has acted as a trigger to unwind over-stretched positions, particularly those that shortened the US dollar,” he told

Kohl believes the current suppression of risk appetite could last several weeks before the franc starts to lose ground later in the summer to trade at SFr1.25 against the euro and SFr1.28 by the end of the year.

But he was less optimistic about the dollar rallying in the face of mountainous state deficits in the United States.

“I expect the franc to stay strong against the dollar for longer because the US government is not tackling its debt problem,” he said.

Backfiring strategy

Jan-Egbert Sturm, head of the KOF Swiss Economic Institute, fears that the European debt crisis may be about the reach a new and more dangerous chapter. Quite apart from Spain or Italy possibly needing a bailout next, the European Central Bank (ECB) may have overstretched itself, according to Sturm.

The ECB has been working around the clock for the last year to prop up the failing economies of Greece, Ireland and Portugal by buying up vast quantities of government bonds.

The full extent of that strategy is only starting to become clear as Greece struggles to impose reforms that would help it pay off the bonds it sold to the ECB.

Sturm fears that the ECB’s bond buying programme could backfire if they are not paid back.

“If that happens then it is an entirely different story,” he told “The capital base of the ECB is at stake and that could change the picture from being a country specific problem to a Europe-wide problem.”

Although not directly affected by the problems of eurozone countries or the ECB, Switzerland would inevitably feel the effects as more investors bought its currency.

“Large money flows into Switzerland are good for the financial sector, but not for exporters,” Sturm told “I am still worried about the consequences for Swiss exporters – not today, but tomorrow.”

Strong franc

The Swiss franc is a so-called “safe haven” currency, that means that investors and speculators buy it when other currencies, including the euro and the US dollar, are under pressure.

The increasing value of the Swiss franc is a source of great frustration for exporters because their goods are more expensive to sell outside Switzerland, particularly in the eurozone.

It costs around SFr1.22 to buy a euro at present. A year ago, it would have cost SFr1.48. The increase in the value of the franc over the 12 months is about 17%.

The franc has also gained inexorably in value against US dollar, that has been weighed down by slow economic growth and – above all – an increasing mountain of debt.

The dollar has been below parity against the franc for some time. A single dollar can now be bought for around 85 Swiss cents.

The Swiss National Bank has emphasised that it does not pursue an exchange rate target, but consistently bases its monetary policy on its legal mandate.

This mandate stipulates that “the SNB is required to ensure price stability, while taking due account of economic developments”.

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