Swiss Franc’s Decline as Safe Haven Bad News for Japan

The Swiss franc declined 0.6 percent to 82.09 centimes to the U.S. dollar in mid-day trading in London today. The pullback is based largely on speculation the Swiss National Bank will continue its efforts to weaken the currency. Investors have been turning to the Swiss franc as a safe haven and it is this demand that has caused the franc to appreciate against most of the major currencies.

In an attempt to oversupply the currency and halt the franc’s appreciation, the SNB sold another 634.25 million francs into the markets to increase the currency’s supply. The 91-day securities were sold with an average yield of minus 0.75 percent and even with a negative return, some investors were willing to forfeit capital in exchange for the perceived safety of the Swiss currency. Still, it appears that the Central Bank’s efforts have had some degree of success in halting – or at least slowing – the franc’s recent appreciation.

Safe Haven Status Diminished

It is too early to say with certainty if the SNB’s latest actions will prove sufficient to tarnish the franc’s safe haven status, but the Bank has managed to reverse some of the gains. In the six weeks ending in the middle of August, the franc rose 17 percent on the U.S. dollar and this rapid appreciation forced the SNB to intervene. The franc has since given back much of its earlier gains and is now worth only 5 percent more against the dollar than it was in early July.

If the franc continues to weaken, it will add considerably to the pressures already facing Japan’s policymakers. Like the franc, the yen has been a preferred target for storing funds in the search for short-term relief from the recent mayhem in the markets.

Japan Faces Economic and Political Upheaval

Complicating matters in Japan is the fact that the nation has just installed its fifth Prime Minster in six years. Formerly Japan’s Finance Minister, Yoshihiko Noda was selected earlier today to replace former Prime Minister Naoto Kan who resigned following severe criticism over his handling of the earthquake and tsunami that struck the island nation last March.

Noda is considered a “hawk” who earlier this month oversaw the sale of 4.5 trillion yen as part of Japan’s efforts to stem the yen’s rise. He has already hinted that his government will continue its proactive approach to prevent further appreciation of the currency.

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