In September lasy year, Switzerland abandoned the last remnants of its floating exchange rate policy (which was already a "dirty float" as they had intervened heavily to limit the increase in the value of its currency) for the franc and in effect implemented a fixed exchange rate of 1.2 francs per euro.
This was done in part to help exporters, which had been hurt by the previous big gain in the exchange rate value of the franc, and in part to fight price deflation, which the Swiss National Bank (the SNB) like most central banks abhor.
The policy has been successfull in the sense that the SNB has been successfull in keeping the franc firmly at 1.2 against the euro, and the Swiss economy has been doing better than most other European economies.
However, it has come at a price as the defense of the exchange rate has forced it to increase reserves from an already sky high 49% of GDP to 71% of GDP
. That's as if the Fed had assets of $11 trillion denominated in foreign currencies.
In the short term, the only thing that could prevent the SNB from keeping this up would be if price inflation became a problem, but that seems like a distant concern as the consumer price index was 0.7% lower in July compared to a year earlier
However, if and when the franc is again again allowed to rise in value this means that the SNB will make greater and greater losses the bigger its reserves of foreign currency assets are. With reserves at 71% of GDP, a 10% gain would cause them losses of 7.1% of GDP compared to 4.9% when reserves were 49%.
This fact could either hasten or delay the demise of the fixed exchange rate. It could hasten it if officials see this and decide they want to limit the future losses by reducing purchases. It could also delay because officials want to prevent the realization of those losses. However in the latter case inflation would ultimately become a problem, something that might compel them to end it.