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Franc and earnest: that may be the best way to go

Australia could follow the Swiss and the Japanese and step in to protect their currencies, writes Eric Johnston.

Australia could follow the Swiss and the Japanese and step in to protect their currencies, writes Eric Johnston.

FEARING their economies could be crippled by some of the world's floundering power currencies, Switzerland and Japan are taking matters into their own hands.

The Japanese government intervened in currency markets early yesterday to curb the rise of the yen against the US dollar. The yen's rally has threatened to hurt the country's exporters, many of which are still recovering from this year's tsunami and earthquake.

The intervention came just hours after the Swiss central bank yesterday unexpectedly cut interest rates by a quarter of a percentage point to zero to reverse the steady rise of the franc, which is regarded as a haven for investors amid Europe's economic turmoil.

Some say there is a case for Australia to take similar steps. Exporters ranging from the manufacturing, tourism and eduction sectors are increasingly finding themselves priced out of the reach of their main customers as the Australian dollar continues to trade well above $US1.

"The Swiss and Japanese are very cognisant, with the damage not just in the short term but in the long term from currency appreciation that they have very little control over," said Heather Ridout, chief executive of the Australian Industry Group. "They're putting in strategies to deal with it.

"In Australia's case, we don't have a strategy. We have been calling for a plan to deal with the impact on major employment sectors such as manufacturing that are on the sharp end of these large currency appreciations."

The Swiss central bank declared the currency "massively overvalued" against the US dollar and euro, and cut interest rates to discourage investors from buying Swiss francs.

The franc retreated slightly, but not enough to ease the fears of the country's industries, ranging from watchmakers and engineers to ski-field operators.

Switzerland is protected from the economic woes of the rest of Europe. It has a large current account surplus, its net debt is running at 38 per cent of gross domestic product, its economy grew at 2.6 per cent last year and unemployment is low.

In the past six months, the Swiss franc has risen more than 23 per cent against the US dollar and up 36 per cent on the year.

The euro has fared little better against the franc. Following Greece's woes, investors are now sweating over the financial future of Italy and Spain, leading to a flow of funds into the franc.

Japan's Finance Minister, Yoshihiko Noda, said the "excessive" rise in the yen was hurting exporters, making its cars and electronic goods more expensive.

The yen has climbed against the US dollar by about 10 per cent in the past year, and by 4 per cent in the past month. The Australian dollar has risen more than 17 per cent against the US dollar over the past year, due to high interest rates, low government debt and solid economic growth. That climb has been the third-highest among the world's key currencies. Only the Swiss franc and the New Zealand dollar have risen more than the Aussie.

New Zealand's Finance Minister, Bill English, said this week its currency had reached levels no one could have anticipated.

In the past decade, the Australian dollar has risen a blistering 107 per cent against the US dollar, a narrow second behind the Swiss franc, which is up more than 120 per cent on the decade.

None are more aware of currency moves than Australia's big pharmaceutical company CSL.

"CSL has a major production facility in Switzerland and the strong Swiss franc means that export product from this facility will now likely land in the US at a higher cost base," said Goldman Sachs healthcare analyst Ian Abbott.

This rise in the Swiss currency was likely to create a "material headwind" for CSL's profit this year.


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