One of the most stabilizing factors of the Euro over the years has been the fact that it was always pegged to a fixed exchange rate with the Swiss franc. Surprisingly, that came to an end recently as the Swiss decided to end this policy. The move resulted in a market shockwave that saw the Euro fall substantially against the Swiss Franc and send the market into unexpected chaos in other areas too.
Stunned economists were left wondering why this event had such a big impact on the markets, especially the Swiss Stock Exchange. The move triggered a decline in the Euro that saw it go from being worth 1.2 Swiss Francs down to .84 Swiss Francs. It also caused many Hedge Funds to suffer huge losses and led directly to the overall collapse on the Swiss Stock Exchange. Economist realized that the unpegging of the Swiss Franc would have an impact, but they never expected it to be such a profound one.
The Swiss Franc has long been a popular choice with investors because of the high credibility the Swiss government has in the economic world. When the currency was unpegged, it created even more demand for the Swiss Franc as its value started to immediately rise significantly. Most people would think this would be good for the Swiss economy, but it actually had the opposite effect.
Switzerland is a county that is highly dependent on exports; they make up over 70 percent of the Gross Domestic Product. The unpegging of the Swiss Franc had the effect of making the Swiss Franc very expensive and drove up the price of its exports so the demand for them went down. It gets a bit complicated, but in response to this the Swiss government created new Francs and used them to buy euros. This move was designed to cause the value of the Swiss franc to go back down.
No one is quite sure what will shake out of all this manipulating, but the forecast for Swiss growth has been downgraded to less than 1% for 2015; it was originally forecast to be closer to 2%. When central banks have tried to manipulate currency in the past, history shows that this often has a negative effect on a country. Economists are keeping a close eye on the Swiss economy to see what happens next.
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