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Why should the Swiss central bank action matter to you?

Michael Santoli
Michael Santoli
WSJ's Michael Casey discusses the impact of Switzerland’s central bank decision to eliminate a cap on the franc-euro rate on the U.S. dollar.

Switzerland has fewer people than Virginia and a smaller economy than Turkey. Yet an arcane policy move by the Swiss National Bank early Thursday rocked global financial markets.

When Switzerland’s central bank ended an effort to limit the rise of the Swiss franc, the franc soared by 30% against the euro, the Swiss stock market shed a quick 10% and U.S. shares dropped in the initial shock.

How will the Swiss surprise matter to the typical American, if at all?

--The limited, but coveted, array of goods that the U.S. buys from Switzerland, including watches and chocolate, will likely get more expensive. The largest Swiss companies include pharmaceutical giants and banks, but their products are not, strictly speaking, sourced in Switzerland.

A strengthened franc also means Switzerland, one of the world's most expensive countries, gets pricier for tourists. Already, there have been reports of higher ski pass rates at popular resorts.

--The central impact of the SNB decision to cease suppressing the value of the franc is to upend popular financial-market bets and add pressure to an already- struggling eurozone economy.

As fund manager Luke Bartholomew of Aberdeen Asset Management puts it, “Switzerland’s problem is that it is almost too credible as a safe haven. People desperately want to hold the currency to shield themselves from the risks they see elsewhere, particularly in the euro area.”

The well-earned Swiss reputation for financial conservatism and “hard” currency stands in stark contrast to the euro bloc that surrounds it, which is staggered by heavy debt loads and growth-strangling fiscal policies.

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With the European Central Bank widely seen as preparing a stimulus effort to buy up large quantities of government and other bonds  perhaps as soon as next week – the pressure on the euro appeared likely to increase. The Swiss policy makers seem to have concluded that the cost of restraining the franc’s value by purchasing European bonds itself would become too high.

Many hedge funds and other investors had taken comfort in the idea the Swiss franc would not appreciate much, so they either sold it short or borrowed in Swiss francs to invest elsewhere. Today’s startling surge in the franc has punctured those strategies and could lead to a spillover across other markets as those cornered investors are forced to sell other assets.

This episode is at least on the surface reminiscent of the triggers for the Asian financial crisis of the late ‘90s, which began with Thailand abandoning its currency peg.

--An appreciating Swiss franc could also harm consumers in Eastern Europe, who in recent years have commonly borrowed in Swiss francs due to ultra-low interest rates.

According to Bloomberg News, more than 40% of mortgages on the books of Poland’s banks are denominated in Swiss francs. When the borrowed currency surges against the borrower’s home currency, the effective cost of that debt balloons.

An even-weaker Europe will further drag on global growth and the profitability of American multinationals, intensifying questions about whether the domestic American economy can remain largely insulated from worldwide malaise.

--A less tangible but undeniable result of the Swiss move is to deepen the sense that the world’s central banks are increasingly desperate to experiment in a bid to control currencies, capital flows and economic fortunes.

Some $12 trillion in new money has been created since the global financial crisis by the major central banks in a broad attempt to bolster hobbled banking systems, ease debt service and revive a damaged global economy.

In most cases, such as in Japan and Europe, the central banks are intent to force their currencies lower, which chases capital to the perceived havens such as Switzerland and, to a significant degree, the U.S.

With so much money in motion – and now skittish thanks to the SNB’s reversal of a policy it avowed just weeks ago – the main concern is that the unintended economic consequences could be significant.