Development Tendencies in the Swiss Money and Foreign Exchange Markets

Georg Rich, Director of the Swiss National Bank

Kapitalmarktforum of the WGZ-Bank Luxembourg S.A., Luxemburg, 7 September 2001, 07.09.2001

At present, the world economy is passing through a major turbulence that also affects the Swiss economy. The debate centres on the causes and implications of the slowdown in US economic growth and on the development of the US dollar exchange rate. Therefore, this speech first deals with the outlook for the US economy and the dollar exchange rate. Even though numerous financial analysts tend to paint a bleak picture of the US economy, there is no reason for undue pessimism. In principle, the US Federal Reserve has placed monetary policy on the right track and has created the conditions required for a recovery of the economy. However, it is unlikely that US economic growth will rebound quickly. Many market participants seem to overestimate the speed at which Fed is able to pull the economy out of the current cyclical trough. Furthermore, the future evolution of the dollar exchange rate will depend largely on the question of whether the US will manage to return to high rates of economic growth after overcoming the current slump in economic activity.

The Swiss economy – after a long period of stagnation – began to grow again at the end of 1996. Due to painful structural adjustments, it seems to have managed to strengthen its international competitiveness. However, as a result of the turbulent international environment, the Swiss recovery turned out to be rather bumpy. In particular, the effects of the US slowdown were felt clearly in Switzerland. The exchange rate, by contrast, did not cause any major problems. While the Swiss franc – like the euro – has tended to be weak against the dollar, it has been astonishingly stable against the euro. Frequently, the stability of the franc/euro exchange rate is prompting market participants to suspect that Switzerland has discarded its monetary autonomy in favour of informally pegging the franc to the euro. But these conjectures are completely unfounded. If Switzerland were to peg its currency formally or informally to the euro, it would forgo two important advantages of monetary autonomy: The relatively low level of Swiss interest rates and the ability to tailor monetary policy, at least to a limited extent, to its own needs.