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Friday, January 16, 2015

Euro Crashes Against Swiss Franc

Euro Crashes Against Swiss Franc

The Swiss central bank has pulled the plug on the euro and the euro has dived across the board and crashed against the Swiss franc. The Swiss franc has exploded against all currencies up 13% against the dollar as I write. At one stage it was down around an earth shaking 25%. Meanwhile gold, an analogue to the Swiss franc, has spiked $20.
So this is the background: During the euro crisis huge waves of hot money swamped the Swiss franc as fear of a euro collapse made international funds dash for safety. The Swiss franc is a renowned and historic haven for hot money in times of uncertainty. The Swiss franc span upwards out of control and threatened to crush Swiss commerce. This was terrible news for Switzerland. How can you export your goods to the world when your currency is so high it is better than gold?

The answer is to peg yourself to the offending currency–the euro–and buy it and other currencies to pull the price of your currency down. In effect you say, “you want my currency, then have it, I’ll print it.” You are then flooded with foreign currency reserves, which is a nice result and your currency doesn’t rise to the moon. You can always buy back your currency with that money later and probably turn a fat profit.
So that is what Switzerland did. It pegged the Swiss franc to the euro.
Now it has said, “let’s forget that, time to let the market take its course.” Boom, this is what happened next – the euro collapses against the Swiss franc:
swissfranc This shows the scale over three years and the operation of the peg:

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