“Franc-ly that’s unfair”: the US labels Switzerland a Currency Manipulator

December 30, 2020

3 min read

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What's going on here?

The US Treasury Department released its semi-annual report saying Switzerland (along with Vietnam) had intervened to artificially prevent its currency rising against the dollar.

What does this mean?

The Treasury Department, in identifying currency manipulators, looks at several factors: (i) the size of the trade deficit, (ii) the interventions of the country in the market, and (iii) factors regarding finance flows. 

The trade surplus or deficit is the difference in the value of imports and exports; if a country exports more than it imports, it has a surplus; if it imports more, it has a deficit. An increase in exports causes a greater demand for the currency of the exporting country. The greater demand for the currency causes the value of the currency to rise.

This can have negative effects, mainly inflation, causing governments and central banks to intervene and create a stable value for their currency. A certain amount of intervention is expected and accepted. The US’s accusation is that Switzerland and Vietnam have gone beyond this limit. China has consistently infringed in this area to maintain its trade surplus with the US and maintain its economic growth.

What's the big picture effect?

The new Swiss labelling is reportedly due to pandemic financing from the Swiss government. One reason this has happened is a surge in gold exports from Switzerland, as risk-averse investors sought the safe-haven commodity. Gold is viewed as such because its value is less likely to change dramatically in a highly volatile and unpredictable market. This meant a rapid increase in the size of the trade surplus with the US.

The resultant rise in demand for Swiss Francs was compounded by its position as a safe-haven currency. Like gold versus other commodities, certain currencies are considered immune from dramatic downturns in value, chief among these is the US dollar, considered the global reserve currency. Like gold, investors turn to these during volatile markets.

Switzerland’s intervention, according to the US, amounts to 14% of GDP spent on foreign exchange markets, far greater than previous interference and the Treasury’s threshold of 2%. This is done by buying foreign currency (generally the dollar), thus increasing the available supply of Swiss Francs for those seeking to purchase Swiss exports.

Vietnam, similarly, has seen a dramatic increase in its trade surplus with the US. However, its increase is due to the US-China trade war more than the pandemic. One of the reasons for the trade war is China’s massive trade surplus with the US. In response, the Trump administration levied heavy tariffs on China. This has driven manufacturing out of China, as companies seek other countries with similarly cheap labour, without tariffs. One of the main beneficiaries has been Vietnam.

Vietnam does not want to give up this position, therefore, it artificially maintains a lower price for the Vietnamese Dong against the dollar, maintaining the cheap cost of its exports to the US. This cannot be done perpetually and must eventually be wound down. This too involves dangers, as Thailand found when it “unpegged” its artificially strong currency from the dollar in 1997, resulting in crashes of the baht and other South-East Asian currencies.

In practice, the labels are unlikely to result in significant action. Steve Mnuchin, the Treasury Secretary, has urged the countries to cease their activities, saying they hurt American firms and workers and arbitration may follow. The greatest effect will likely be added pressure on the incoming Biden administration to prevent widening of trade deficits.

Switzerland rejected the tag and said it “remains willing to intervene more strongly”. Vietnam emphasised its commitment to stability and said it would work with US authorities to prevent unfairness.

Report written by Joshua White

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