I’m guessing that most readers of this blog are not heavily invested in the Swiss franc, so Tuesday’s dive will likely have little direct impact on their portfolios – but the move could have wider implications.
On Tuesday, the Swiss National Bank in its latest attempt to put a limit on the franc’s rise did just that, setting a limit on how high it can rise against the euro. When the euro falls below the 1.20-franc threshold (it hit a low of 1.03 on Aug. 10), the bank will buy euros “in unlimited quantities” in an effort to drive up the value of euro and drive down the value of the franc. So far, so good: The Swiss franc fell 8 per cent against the euro on Tuesday.
But the broader issue is what the move means for haven investments, given that the franc had been seen as one of the go-to havens among safety conscious investors in recent weeks, with some observers even commenting that the currency was as good as gold. With one haven essentially losing its haven status – an 8 per cent decline will do that – where will risk-prone money flow next?
One idea is gold, but it isn’t behaving. It fell to $1,878 (U.S.) an ounce on Tuesday afternoon, down $22.
The other idea is that the U.S. dollar and U.S. bonds will simply pick up the slack, and there is plenty of room to do so. Bonds certainly rallied as investors recoiled from stocks, with the yield on the 10-year U.S. Treasury bond falling to 1.97 per cent – its lowest level since the 1940. (Yields fall as bond prices rise.) The U.S. dollar index, which weighs the currency against a basket of other currencies, rose to 76, marking the high point of a recent six-month trading range.