From the FINANCIAL TIMES:
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….
Analysts said the move raised the stakes in the global currency war as countries vie to protect their exporters and, by removing a release valve for investors looking for a haven from current market turmoil, could heighten instability on financial markets.
“The start of full-on currency wars has started in earnest,” said Maurice Pomery, chief executive at Strategic Alpha. “After currency wars come trade wars and as we see the exporting world pressured as the developed world contracts, tensions will rise.”
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EDITOR: The USA and other countries have been following policies to weaken the value of their currency to increase exports and discourage imports. This has been necessary because of China’s refusal to allow its currency to rise to a level determined by the market.
Investors have been looking for a safe harbor to protect the value of their savings. Demand for Swiss francs drove up its value in relationship to other currencies. This is bad for the Swiss economy because their goods and services become very expensive and also for mortgage borrowers throughout Eastern Europe whose loans were valued in terms of Swiss francs, thus driving up interest rates on homes by as much as 80% in their local currency.
Once governments begin manipulating the value of their currency, the likelihood of a trade war through tarrifs becomes more likely. “Begger thy neighbor policies'” are considered one of the major causes of the Great Depression.
