Why did the Swiss National Bank fix the EUR/CHF exchange rate at CHF 1.20?
Two questions actually:
Why did the Swiss National Bank fix the EUR/CHF exchange rate at EUR 1 = CHF 1.20 as of September 2011?
How are they making sure that the exchange rate stays at CHF 1.20?
See the current EUR/CHF exchange rate at Yahoo Currency Converter.
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It's not. If you look at the page you link to and change dates, it's clear the rate changes a bit. 120.15 120.1 per hundred.
The Swiss can keep the 1.200 as a target and if it's higher, sell agingst the euro to bring it down, if lower, buy.
If the swiss experienced a serious financial crisis and their currency fell, they may not have the power to control it, if the rest of the world said it was worth less, you can be sure it will fall.
Due to the issues in the Eurozone, many foreign investors were buying Swiss Francs as a hedge against a Euro devaluation. They were in effect treating the Franc like gold, silver or some other commodity with perceived intrinsic value.
This causes huge problems from the Swiss, as the value of the Franc increased and their exports became more expensive for foreigners to purchase. Things were getting bad enough that the Swiss in some places were travelling to Germany to buy groceries!
To enforce this "fixing" of the Franc, the Swiss Central Bank announced that they would buy foreign currency in unlimited quantities by printing Francs. In reality, just announcing that they were going to do this was sufficient to discourage foreign investors from loading up on Francs.
NPR's Planet Money did a really good job covering this topic:
www.npr.org/blogs/money/2011/08/19/139791374/the-friday-podcast-switzerlands-too-strong-for-its-own-good http://www.npr.org/blogs/money/2012/01/09/144906094/swiss-franc-is-the-peg-working
As the European crisis worsened the Swiss Franc (CHF) was seen as a safe currency so Europeans attempted to exchange their Euros for Francs. This caused the Franc to appreciate in value, against the Euro, through the summer and fall of 2011.
The Swiss government and Swiss Central Bank (SNB) believe mercantilism will create wealth for the citizens of Switzerland. The Swiss central planners believe that having an abundance of export businesses in Switzerland will create wealth for the citizens of Switzerland as the exporters sell their good and services abroad and pocket a bunch of cash. Thus, the central planners tend to favor exporters. From the article:
At the start of the year, when exporters urged for government and SNB action, ...
The Swiss Central bank continued to intervene in currency markets in 2011 to prevent the CHF from appreciating. This was done to prevent a decrease in export business. Finally after many failed attempts they announced the 1.20 peg in September.
The central planners give little consideration to imports, however, since manufacturers in foreign countries don't vote or contribute to the campaign funds of the central planners in Switzerland. As the CHF strengthened many imported items became very cheap for Swiss citizens. This was of little concern to the central planners.
Currencies are like other goods in a market in that they respond to supply and demand. Their value can change daily or even hourly based on the continually varying demands of people. This can cause the exchange rate to rise and fall against other currencies and goods. Central planners mistakenly believe that the price of certain market items (like currency) should not fluctuate. The believe there is some magical number that will cause the market to operate "better" or "more correctly".
How does the SNB maintain the peg? They maintain the peg by printing Francs and purchasing euros.
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