Tuesday, March 04, 2008

Swiss Franc-Next Currency To Surpass U.S. Dollar

Setting aside some currencies of very small or poor countries, there has traditionally been just one mayor currency which has had a higher value than the U.S. dollar. Namely, the U.K. pound (aka sterling). Then after the creation of the euro in 1999, another currency with a higher value than the U.S. dollar appeared. But then the euro fell and the U.S. dollar was higher valued than the euro between early 2000 and mid-2002. After that however the euro regained its status as more valuable than the USD and is now worth more than 1.5 USD. In September last year, after the Fed's first fed funds rate cut in this cycle, the Canadian dollar became the third currency to become more valuable than the U.S. dollar. The Canadian dollar have since fluctuated between a level slightly above and below the U.S. dollar, rising whenever investors focus on commodity prices and falling whenever they focus on the non-commodity part of the Canadian economy. It is currently however slightly higher valued than the USD, with one U.S. dollar costing 0.9867 Canadian dollar.

I now boldly predict that the fourth major currency to surpass the USD will be the Swiss franc. The Swiss franc is already up quite significantly-from 0.82 USD to 0.96 USD (As the USD has fallen from 1.22 Swiss franc to 1.04 Swiss franc), a 17% increase. This is faster than the 15% rise of the euro. The Swiss franc has for long been held down by the so-called carry trade because nominal interest rates is lower than in most other countries. Yet this has been a result of lower inflation rather than lower real interest rates so that has been somewhat unfair. Monetary conditions in Switzerland have actually been fairly tight, with M2 money supply contracting and M3 increasing only slightly (up 1.2%). The result of the combination of tight monetary conditions and a until recently weak currency has been that Switzerland's already huge current account surplus have soared to 85 billion Swiss franc or 17% of GDP.

Today more news bullish for the Swiss franc was released. Switzerland's GDP growth accelerated in the fourth quarter of 2007 to 3.6% compared to Q4 2006. Compared to Q3 2007 real GDP rose 1.0%, which is 4% at an annual rate. This indicate that the Swiss economy is "decoupling" and that together with a rise in price inflation certainly indicate that the Swiss National Bank will be more likely to raise than to cut interest rates. Add to that the likely continued aggressive Fed rate cuts and the Swiss franc's status as a safe haven during stock market turmoil, and the Swiss franc looks nearly certain to rise above the U.S. dollar in value within a not too distant future.


Anonymous Anonymous said...

After CHF, the Australian dollar is next in line. It's worth about .93USD today. And if the USD keeps crashing, it will be overtaken by the New Zealand dollar as well.

3:49 PM  

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