Swiss Franc Fallout Ripples Round the World

AMA2-7-15Fallout continues from the Swiss National Bank’s recent decision to drop it cap on the Swiss franc’s value in trading against the euro. This latest salvo in what’s being called the new currency wars is having some surprising effects not just in Switzerland’s European neighbors, but also the rest of the world, including the United States.

The Swiss move to drop the cap on the franc came in mid January 2015 in response to The European Central Bank’s plan to institute a round of quantitative easing that would get more euros in circulation and boost European economies. Immediately after the cap was removed, the franc surged in value and the euro dropped.

That plunged Switzerland into some quick efforts to shore up its own economy, which seemed poised to fall into recession. Some brokerages failed, and the government embarked on a rapid round of buying up foreign currencies, including lots of euros, in an effort to weaken the franc’s strong showing. The effects of the suddenly surging franc were felt in neighboring Eastern European states like Lithuania, whose national debt is franc-denominated. Those countries with franc=denominated debt may be forced into buying up more foreign currency to shore up reserves as the franc continues to float.

There were consequences in Western Europe too. One of the most surprising of these is the unexpected boost to the profits of German brothels, where Swiss clients make up about half the clientele since the currency change. Since the franc is still trading strong against the euro, it goes much further for services of all kinds, including those of prostitutes.

But German houses of ill repute aren’t the only enterprises feeling the effects of the new valuation of the Swiss franc. It’s even affected the US dollar and virtually any US company doing multinational trade in this increasingly globalized world. And the ripple effects from the rise of the franc demonstrate just how interconnected that world really is.

As we’ve reported here before, some large US concerns have been touched by the rapidly changing states of the euro and the franc. US based megabank Citigroup, one of the world’s largest international currency traders, took a moderate hit, measured only in the millions, from the franc’s surge. And even the computer giant Apple saw a dip in its last-quarter profits thanks to the weaker euro.

The same issues face many other smaller companies doing business in the international community. The euro, along with the dollar and yen, and yes, the Swiss franc, are widely viewed as the stalwarts of the global currency world: stable and secure monies that can survive the fluctuations of the market. But those markets are increasingly volatile – and in the “currency wars,” many bets are off.

That’s why the US dollar, long the world’s go to currency for stability and strength, has also been caught up in the ongoing euro-franc drama. In recent trading the dollar’s value fell against the euro, even as the euro was regaining some strength against the Swiss franc. The dollar’s tumble in value actually benefited the franc, which still continues to ride high even as the euro regains some strength thanks to the efforts of the European Central Bank.

The franc/euro/dollar dance may not be just a result of market forces at play, though. Even as the ECB planned a round of bond and security buying to get more euros circulating, speculation arose that the Swiss National Bank might be actively intervening to manipulate the value of the franc against the euro – and indirectly, against the dollar too.

Most Americans have never heard of the rumored “global currency war” – and most never will. But those skirmishes being played out in Europe and the rest of the world involve the good old greenback – as well as the many of the goods and services it pays for, that are taken for granted every day.

The current situation is another demonstration of the interconnectedness of the world’s money markets. And that interconnectedness affects businesses small and large, from brothels to iPhone sellers and beyond. (Top image: Flickr/imagesofmoney)

Sources:
Porgione, Sam. “Dollar Falls vs Euro on Swiss Bank Speculation, Optimism on Greece.” Reuters. 5 Feb 2015

Sheahan, Maria. “German Brothels Are Booming, Thanks to the Swiss Franc.” Business Insider via Reuters. Business Insider. businessinsider.com 6 Feb 2015.

Read more from The American Monetary Association:

US Banks Hit By Swiss Franc Fallout

Who’s Winning the Currency Wars?

The American Monetary Association Team

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