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Portfolio > Economy & Markets

Swiss Franc on Runaway Course

By Marlene Y. Satter

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Tourists wanting a cup of coffee in Zurich these days will pay dearly for the privilege: A single cup at Café St. Gotthard costs $8.30 at Tuesday’s exchange rate, according to a Bloomberg report. A Big Mac costs 128% more in Switzerland than in the U.S., up from 72% more in 2010.

Christoph Blocher, a billionaire entrepreneur and former justice minister for Switzerland’s People’s Party, was quoted saying, “The franc is catastrophically overvalued.” With the value of a Swiss franc so high that ordinary goods become prohibitively expensive, Switzerland is contemplating drastic action.

The form that action may take is undetermined, although Thomas Jordan, vice president of the Swiss National Bank, said that “a whole range of options” was being considered. One of those may be a target for the franc. With the Swiss currency 39% overvalued against the euro, as determined through purchasing power parity by the Organization for Economic Cooperation and Development, everything is at risk, including wages.

Some companies are coping by paying salaries in euros instead of francs; at others, workers are logging extra hours without pay. Still others are pushing to cut costs to sustain margins. Growth forecasts have been cut and there is the possibility of pay cuts or even layoffs if the currency continues its skyward flight.

A SonntagsZeitung newspaper report on Sunday spoke of “intense” discussions between the Swiss central bank and the government, with measures to peg the franc to the euro in readiness to be deployed during the coming week. If the action is taken, it is expected that the franc’s value will be set initially at about 1.10 against the euro. Increases could follow gradually.

The plight of the franc has been caused, as previously reported by AdvisorOne, by investors desperate to seek out safe havens over fears of euro zone debt contagion and fears over the credit rating downgrade of the U.S.

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