The Swiss Will Weaken the Franc to Avoid Deflation

The euro weakened last week against other major world currencies, following data indicating a deterioration in the economic situation in the eurozone and the announcement of further interest rate cuts.

The exchange rate of the euro against the US dollar fell by 1.5 percent last week, to 1.2804 dollars. This brings the euro’s loss against the dollar in January to 8.4 percent. Against the Japanese currency, the price of the euro fell by 0.2 percent, to 114.9 yen. Since the beginning of the year, the euro has weakened by more than 9 percent against the Japanese currency. However, the yen weakened against the US dollar last week, causing the dollar price to jump by more than 1 percent, to 89.75 yen.

The pressure on the euro followed mid-week after the statistical office Eurostat announced that in January, inflation in 16 eurozone countries fell to 1.1 percent, the lowest level since July 1999. Additionally, Eurostat reported that in December last year, the unemployment rate rose from 7.9 to 8 percent.

“The latest data on inflation and unemployment highlight the negativity of forecasts for the eurozone economy. I believe this will continue to exert pressure on the euro,” assesses BNP Paribas analyst Ian Stannard. The single European currency came under additional pressure following a statement from European Central Bank (ECB) President Jean-Claude Trichet that the central bank could lower the key interest rate in the eurozone below the current 2 percent.

Moreover, due to the global financial crisis, the dollar and yen are considered safe-haven currencies, so their values fluctuate depending on perceived changes in investors’ risk tolerance. Currencies also closely follow movements in stock markets, with lower stock prices contributing to an increase in aversion to risky investments.

“There is a reduction in risk appetite, which is beneficial for the dollar and yen due to their perceived safety,” says Christian Lawrence, currency strategist at RBC Capital Markets. The dollar, on the other hand, strengthened against the yen after the latest data showed that the US economy contracted by 3.8 percent in the fourth quarter of 2008, less than the 5.4 percent analysts had expected.

The US currency significantly strengthened against the Swiss franc by the end of the week, to 1.1599 francs, after Swiss President and Finance Minister Hans-Rudolf Merz stated that he would support the Swiss National Bank if it wishes to weaken the franc. Prior to that, the President of the central bank, Philipp Hilderbrand, stated that the bank is ready to undertake limited interventions to weaken the franc and prevent deflation. (Hina)