The Intelligent Investor Growth Fund is listing on the ASX. Initial Offer now open

Switzerland acts to cool its sizzling franc

The Swiss central bank has cut rates to reverse the rise of its currency, writes Eric Johnston.

The Swiss central bank has cut rates to reverse the rise of its currency, 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 yesterday to curb the rise of the yen against the US dollar. This rally has threatened to hurt Japanese exporters, many of which remain vulnerable after the tsunami and earthquake this year.

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

Some say there is a case to be mounted in Australia as exporters from manufacturing and tourism to education are increasingly finding themselves being priced out of reach from their main customers with the Australian dollar persisting over $US1 for most of this year.

"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. Fearful of the impact on economic growth, it used the rate cut to discourage investors from holding Swiss francs.

The franc retreated slightly, but not enough to ease the fears of such exporters as watchmakers, engineers and ski field operators.

Protected by mountains and lakes from the rest of Europe's economic woes, Switzerland is in pristine health compared with its neighbours. It has a large current account surplus, net debt is running at 38 per cent of gross domestic product, the economy grew at 2.6 per cent last year, and unemployment is low.

The Swiss franc is up more than 23 per cent against the US dollar over the past six months, and up 36 per cent on the year.

The euro has fared little better against the franc. After Greek woes, investors are sweating over Italy and Spain, causing skittish investors to move more funds into the franc.

Japanese authorities moved to protect their economy by selling yen and buying US dollars to cool their currency. Japan's Finance Minister, Yoshihiko Noda, said the move was aimed at countering "excessive" rises in the yen. This is hurting Japanese exporters, making cars and electronic goods more expensive. Against the US dollar, the yen has surged about 10 per cent in the past year, and 4 per cent in the past month.

Helped by high interest rates, low government debt and solid economic growth, the Australian dollar has risen over 17 per cent over the past year, posting the third highest gains over the US dollar among the world's key currencies.

Only the Swiss franc and the New Zealand dollar have risen faster than the Australian dollar. This week New Zealand's Finance Minister, Bill English, said the currency had reached levels no one could anticipate and New Zealand would prefer a lower exchange rate.

Over the past decade the Australian dollar is up a blistering 107 per cent against the US dollar, coming a narrow second behind the Swiss franc, which is up over 120 per cent on the decade.

The Australian pharmaceutical major CSL will feel this, an analyst said.

"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 a Goldman Sachs healthcare analyst, Ian Abbott.

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

Join the Conversation...

There are comments posted so far.

If you'd like to join this conversation, please login or sign up here

Related Articles