Analysis: A currency manipulator tag for Switzerland may not deter FX approach
Saikat Chatterjee, John Revill and David Lawder, 16 December 2020
LONDON/ZURICH/WASHINGTON (Reuters) – The threat of being named a currency manipulator by the U.S. Treasury may be an embarrassment for Switzerland, but even if the country does get the tag, it likely will have little effect on the Swiss National Bank’s monetary policy.
Switzerland is expected to meet all three criteria for such designation in the long-overdue U.S. Treasury report on the foreign currency practices of major trading partners. The Treasury has some discretion on whether to issue such a label, and the coronavirus pandemic, which has thrown trade and capital flows into chaos this year, could be a factor.
There would be no automatic punishment with a label, though U.S. law requires Washington to demand negotiations with designated countries.
Vietnam, Thailand and Taiwan this year have also been in violation https://www.cfr.org/article/tracking-currency-manipulation of the Treasury’s three manipulation criteria: a $20 billion-plus bilateral trade surplus with the United States, foreign currency intervention exceeding 2% of GDP and a global current account surplus exceeding 2% of GDP.
Currency experts expect Treasury Secretary Steven Mnuchin to issue the report within days, just over a month before he leaves office.
“The subtle implication of being put on this list is that you eventually could come under sanctions, and that puts pressure on these countries not to weaken their currencies so much, or to allow strengthening,” said Win Thin, global head of Currency Strategy at BBH.
But he said that in Switzerland’s case, as the exchange rate is its main tool for fighting deflation, “they may say, ‘Well, tough’”.
The Swiss central bank is firmly under the Treasury’s focus after spending 90 billion Swiss francs ($101.50 billion) on foreign currency intervention in the first half of 2020 amid pandemic-driven safe-haven inflows.
The SNB has long argued it is not trying to weaken the franc to gain a trade advantage. Instead, it aims only to stem the appreciation of its currency to head off the threat of deflation, which runs contrary to its goal of price stability.
“Switzerland has always been treated as a special case when it comes to exchange rate policy and even the U.S. Treasury has conceded in the past that Switzerland’s economic situation is “distinctive” and that its monetary policy options are limited by its small stock of domestic assets,” said David Oxley, a senior European economist at Capital Economics.
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This time last year, the Swiss National Bank (SNB) had US stock holdings of $94 billion. The portfolio of Switzerland’s central bank has grown by $56 billion since, reporting ownership of $150 billion worth of US listed stocks as at Q1 2021.