Switzerland’s central bank SNB is fighting to prevent deflation. Debases the Swiss Franc.

The Swiss financial authorities are not even hiding it anymore, unlike their ECB and FED counterparts. They are fighting against deflation. And the way they do it is by engaging in their own currency devaluation. Yes, Swiss Frank, the stalwart of currencies, the safe haven, the almost equivalent of gold is now being debased by the prudent and responsible Swiss for the sake of one thing – to prevent the horror of deflation. That speaks volumes about the fear in the minds of the elites that deflation represents. Consider this news story by Telegraph of UK.

Don’t bid up the Swiss franc. Or else!

That is the Swiss National Bank’s message to the markets – a message it has rammed home several times since March by suddenly selling francs to buy euros or US dollars. Each time, the franc has plunged in response.

By Ian Campbell, Breakingviews.com
Published: 6:39PM BST 30 Jun 2009

Official interventions in currency markets often misfire. The speculators win, leaving the central banks to nurse foreign exchange losses and their pride. But the central banks that lose are usually trying to prop currencies up. The SNB is trying to keep a strong one from becoming still stronger. So far its attacks have scored easily. Traders feel defensive.

Investors’ goals and those of the SNB clash. Foreigners see the Swiss franc as a safe haven but the last thing Switzerland needs is a strengthening franc. That would reduce the price of imported goods, exacerbating deflation. As it is, prices are expected to fall by 0.5pc this year.

The SNB’s line in the sand appears to be drawn at an exchange rate of 1.5 francs to the euro. The central bank’s intervention quickly sent the rate up to 1.53. Last week another approach of the 1.50 level saw another blitz of intervention. Traders were left reeling.

Switzerland’s currency policy ties in with a monetary policy that aims to prevent deflation from becoming worse. The SNB has almost trebled the monetary base in the past year. But the money isn’t being put to use.

The broader M3 measure of money supply, which includes bank loans, is up by just 4pc. Credit is still crunched, but it would be worse without the monetary expansion.

The OECD last week suggested the Swiss should add more fiscal stimulus to their weaponry. But as the US and UK show, fiscal stimulus can quickly rack up deficit and debt and cannot easily be reversed.

The Swiss are right to see monetary policy as more flexible, potent and reversible. And their spot of currency intervention will do no harm at all.