Wednesday, August 10, 2011

Swiss Franc Rapidly Approaching Parity With Euro

After the Fed's "AE" announcement, the Swiss franc approached US$1.40 in value, an incredible 5% gain in just one day, and more than 50% gain in less than 14 months. While the euro has during both periods also gained in value against the U.S. dollar, it too has dropped sharply against the Swiss franc, who is now rapidly approaching parity against the euro.

That is very extraordinary, given the fact that it only 14 months ago costed 1.4 francs to buy a euro and given the fact that for example a Big Mac costs nearly twixe as many Swiss francs in Switzerland to buy as one Big Mac costs in the euro area. The Big Mac is of course only one good, and can sometimes therefore be misleading in cost of living comparisons, but the OECD:s official PPP-estimate basically corrobarates this estimate as it says that the domestic purchasing power of the euro was 88% higher than that of the Swiss franc.

Given Switzerland's higher income level and the Penn/Balassa-Samuelsson-effect a somewhat higher price level could be justified. But when it is nearly double as high, the franc is clearly overvalued from a fundamental point of view.


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