U.S. Should Cut the Swiss Some Slack on Currency Manipulation

(Bloomberg Opinion) -- The Swiss have come clean. There is no use denying that the Swiss National Bank has been intervening heavily to keep its currency from rising. By selling the equivalent of $100 billion worth of Swiss francs in the first half of this year, they've landed in the crosshairs of the U.S. Treasury, whose semi-annual currency manipulator report is due shortly.

In January the U.S. put Switzerland on a watchlist of countries allegedly gaming their exchange rates. One of the tripwires is spending in excess of 2% of gross domestic product on currency market intervention — and the SNB has already exceeded that nearly four times this year.

For all the SNB's efforts, however, it hasn't had much visible effect. The Swiss franc has strengthened by more than 5% to the dollar this year, making it the strongest G10 currency. If the bank hadn't stepped in, the franc would have been even stronger, wreaking further havoc on Swiss GDP, which fell more than 8% in the second quarter because of the pandemic.

It should be evident to the U.S. Treasury that there are much bigger forces at play. For one thing, Switzerland is caught in the gravitational pull of the European Union. Its relatively small, open economy leaves it at the mercy of the euro area that surrounds it. The rush for haven currencies during the Covid crisis has pushed the franc to its strongest level in five years against the euro.

What else can Switzerland do but try to keep a lid on its currency? With official rates already the lowest in the world, at a punitively negative 75 basis points, there's only so much pain that Swiss financial institutions and corporates can take. Due to its export-led economy, a stronger franc creates a much harsher monetary tightening effect compared to what happens in more domestically-focused countries, such as the U.S. The alternatives to suppressing its currency — such as cutting interest rates further, or worse, implementing capital controls — are unthinkable.

It's better for Switzerland to contravene a misguided American policy than to upset its citizens by removing protections against economic slump and deflation. The European Central Bank, despite not officially targeting currency levels, keeps the euro weak with its vast quantitative easing programs, which may well have to be increased again as euro-area core inflation plunges to a record low.

Worryingly for the SNB, the relative strength of the euro versus the dollar this year is not capping the strength of the Swiss franc, as it did in 2018. The euro's strength, however, has meant that Swiss reserves have barely budged so far in the third quarter — a factor that might stay the U.S. Treasury's wrath. 

The U.S. authorities should refrain from branding an ally a currency manipulator, especially if that ally is one of the biggest global investors in American assets. With nearly $1 trillion in foreign reserves, 36% of which is in dollars, Switzerland is a major owner of  U.S. currency, stocks and corporate and government bonds. And it invests in a manner more akin to a hedge fund — famously buying huge amounts of tech stocks, for example — than a traditional central bank currency-reserve manager. The U.S. is also facing a huge current account deficit and a burgeoning budget deficit. Right now it needs to be attracting foreign capital not alienating it.

The smart approach would be for the two countries to work out a path that helps both cut their exposures. After all, Switzerland is in a bind not of its own making, and international friends are harder to come by these days.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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