USD/CHF: Dollar Weakness Persists | Seeking Alpha

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US Dollar The US dollar has recently lost ground against the Swiss franc. The one-year chart below shows that the US dollar was trading at about par with the Swiss franc when it weakened coming into the new year. The COVID-19 correction in March left its mark, but the dollar […]

US Dollar

The US dollar has recently lost ground against the Swiss franc. The one-year chart below shows that the US dollar was trading at about par with the Swiss franc when it weakened coming into the new year. The COVID-19 correction in March left its mark, but the dollar quickly recovered to 0.98. Since April there has been marked US dollar weakness against the Swiss franc, and the present exchange rate is at 0.9059.

This is a problem for the SNB (Swiss National Bank) as the US is an important trading partner for Switzerland. 14% of Swiss exports go to the US. The most important trading partner is Germany with 15% of exports going there. France (6%) and Italy (5%) and Spain (3%) are trading partners in the euro zone. (Switzerland Exports | 1950-2020 Data | 2021-2022 Forecast | Historical | Chart | News)

The Euro

The US dollar has also weakened against the euro. The Bloomberg one-year chart below clearly shows that the euro strengthened against the US dollar substantially starting in July as it went from 1.12 to 1.18.

It is important to understand the interplay between the Swiss franc and the euro in order to appreciate what has happened to the USD/CHF pair. The five-year Bloomberg chart below shows that the euro went down to CHF 1.0624 early in 2017 before recovering and going up to 1.18 early in 2018.

A strong euro is good for Swiss exports to the EU. That means that the Swiss franc is weaker, and that makes it easier for Swiss companies to export to the EU. Swiss exports include pharmaceuticals (26%), jewellery and precious metals (25%), machinery (7%), chemicals (7%), watches (7%), precision instruments (6%), electrical machinery and equipment (4%). In fact 19.8% of the Swiss working force is engaged in industry.

This means that the EUR/CHF exchange rate is extremely important for Swiss exports. It is reasonable to assume that the SNB would intervene in Forex markets should the euro weaken excessively against the Swiss franc. At present, at 1.0754, the Swiss franc is probably close to the limit that the SNB is prepared to tolerate before intervening.

The problem for the SNB is that when the US dollar weakens against the euro, and this is the case, and the US dollar weakens against the Swiss franc, the Swiss franc-euro exchange rate is also influenced. The exchange rate at EUR/CHF 1.07, as mentioned above, is probably at the limit that the SNB is prepared to tolerate. Of course, the Swiss economy is much smaller than that of the US and the EU. That means that the efficacy of intervention on Forex markets on the part of the SNB is effectively limited. From 2012 to 2015 the SNB tried to peg the EUR/CHF pair at 1.20 but gave up. The euro went to 1.10 and since then has rarely weakened to 1.20. At present it is around 1.07.

EUR CHF Chart – Euro Franc Rate – TradingView

Conclusion

It seems that the SNB is going to have to be content having the euro at 1.07 and the US dollar at 0.90. While inflation in the Eurozone is still fairly contained, it may be the case that inflation in the US is going to go much higher due to the huge amounts of money that the Fed has injected into the economy. In that case US inflation would help to compensate for the strength of the Swiss franc in Forex markets. That would help Swiss exports to the US, thereby making them less expensive.

For US investors that have their holdings in US dollars, dollar weakness in Forex markets means that US companies that operate abroad will be making higher profits when proceeds from overseas are changed into US dollars. For American investors that diversified their portfolios with overseas holdings, particularly in Europe and in Switzerland, their net worth in dollars has increased thanks to the lower exchange rate of the US dollar. A curse can be a blessing. It all depends on how one looks at it. A weaker dollar also means that American industry has better chances of competing internationally. A lower dollar means lower prices for American exported goods.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Data from third-party sources may have been used in the preparation of this material and WWS Swiss Financial Consulting SA (WWW SFC SA) has not independently verified, validated or audited such data. WWS SFC SA accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Please consult your own professional adviser before taking investment decisions.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

All investments involve risk, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Data from third-party sources may have been used in the preparation of this material and WWS Swiss Financial Consulting SA (WWW SFC SA) has not independently verified, validated or audited such data. WWS SFC SA accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Please consult your own professional adviser before taking investment decisions.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

All investments involve risk, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.

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