Home > Articles by PoliticalMetals > When will the paper currency you’re holding be the next victim of this global currency war?

When will the paper currency you’re holding be the next victim of this global currency war?

September 7, 2011 Leave a comment Go to comments


Top 10 currency gainers as at Aug 2011

Top 10 currency gainers as at Aug 2011

Two weeks ago, the Swiss Franc was one of the most sought after currencies. Yesterday, a short statement from the Swiss National Bank (SNB) turned the tide.

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures

That’s how fragile the so called safe haven currencies are. Their value and potential devaluation is just a few keystrokes away. This was not the first time the SNB intervened to devalue its currency. It quadrupled its foreign currency holdings in the first half of 2010 in a similar effort to manage the CHF resulting in a record $21 billion loss. Going further back, it pegged the Franc to the German Mark at 0.80 in 1978 resulting in soaring inflation.

Yesterday’s intervention resulted in this dramatic move in the price of gold priced in CHF. That’s not surprising considering the fact that it pledged to ” buy foreign currency in unlimited quantities”. Unlike Greece and other Eurozone countries in crisis, the SNB can print unlimited quantities of CHF to honour that pledge.

Gold priced in CHF after the SNB statement

Gold priced in CHF gained 8% following the SNB statement


The Big Picture of CHF devaluation - One Year Gold in CHF

Putting a floor below 1.2 EUR/CHF appears to be worse than the much criticized move by Malaysia to peg the Ringgit at 3.8 to the USD in 1998. Unlike a peg, a floor allows the CHF to weaken but not strengthen against the EUR. One has to wonder, what will happen to this “former safe haven” currency if the Euro collapsed.

Of late, currency devaluation, capital controls and aggressive central bank interventions have become acceptable, if not respectable, as seen in Brazil, Japan, Switzerland, Iceland, Vietnam & the once almighty US, just to name a few.

When will the paper currency you’re holding be the next victim of this global currency war?

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