The Swiss National Bank, which is the central bank of Switzerland, has announced on September 6th, 2011 that it will set a minimum exchange rate of 1.20 Swiss francs per European euro. Such a policy action is very aggressive and has huge implications on the franc’s valuation, not just against the euro, but against every other currency and commodity in existence.
The Swiss National Bank, also known as the SNB, believes its currency, the Swiss franc, is grossly overvalued at an intolerable level when the franc trades against the euro below 1.20. It’s intolerable because much of Switzerland’s economic growth is due to the exports of goods and services to Europe. Because Switzerland depends heavily on exports to Europe for sustained economic growth, having a strong currency relative to the euro will pose a significant threat toward the Swiss economy.
Europeans who typically purchase goods and services from Switzerland will find it difficult to continue to do so because of foreign price instability (inflation). It will cost more euros to purchase the usual amount of francs. Expensive francs means less demand for the goods and services offered by the Swiss, which in turn would result of domestic disinflation and then domestic deflation.
The reason the Swiss franc appreciated so greatly against the European euro has to do with a global fall in demand for euros and a global rise in demand for francs. Its that simple. The reason why currency demand shifted so significantly was due to elevated debt levels that threatened the entire economic and political infrastructure of the euro area and the Swiss franc’s status as a safe haven currency.