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Ambrose Evans-Pritchard: Switzerland and Britain are now in a currency war

Section: Daily Dispatches

By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, January 3, 2012

It seems you can't debase your coinage these days even if you try.

The Bank of England is straining every sinew to drive down sterling with quantitative easing, and what happens?

The Swiss National Bank trumps Threadneedle Street with an outright blitz of Gilt purchases. They just print it, and buy.

The Swiss and UK central banks are effectively fighting a low-intensity currency war against each other. It has come to this.

... Dispatch continues below ...


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One awaits with curiosity to see what will happen when Japan -- 15 times the size -- kicks in with its own nuclear plans to drive down the yen, and Asia follows suit.

The latest IMF data of central bank holdings shows the biggest jump in sterling bonds held by advanced central banks ever recorded. It jumped from $79 billion to $98 billion in the third quarter.

These holdings are usually stable so it is obvious that the SNB is responsible. The Swiss are already sated on eurobonds as they frantically intervene to hold the franc at E1.20. By their own admission they have been diversifying energetically.

Analysts say the SNB has already bought $80 billion of EMU bonds, enough to cover half the budget deficits of Euroland over the last year. The SNB has been acting essentially as a conduit for capital flight from Italy to Germany.

It has since branched out, allegedly into Aussies, Loonies (Canada), Scandies -- Won?, Real? -- but above all pounds. "There aren't many places to go in this 'ugly contest' if you don't like the euro, dollar, or yen," said David Bloom, currency chief at HSBC.

"Everybody is trying to weaken their currency at the same time. The Swiss have got away with it and now the Japanese want to try. The Sandinavians are pulling their hair out. The Turks are cutting rates even though their economy is overheating and putting in credit controls instead because they don’t want the currency to rise."

"Policymakers are doing things that if you had suggested four years ago they would have put you in a straitjacket and thrown you in a cell. I don't rule out anything any longer in this market. Desperate times lead to desperate acts," he said.

Mr Bloom said sterling will wilt soon enough as Britain loses its AAA rating and graples with its debts. "We have dramatically downgraded our sterling forecast this year to $1.52 on Cable and 0.88 on the euro. The pound is going to come under a lot of pressure."


This blog is not intended to be an attack on the Swiss, valiant defenders of the democratic nation-state. What they are doing is entirely understandable. Such intervention creates net global stimulus and does more good than harm in a deflationary world.

Still, we have a very odd situation. Much of the world needs a lower currency and a higher interest rate structure to right the ship. But they can't all have lower currencies.

Such is the deformed structure bequeathed to us from the Greenspan era. Or is it the China effect, or are they the same thing?

The brilliant Bernard Connolly (former currency director at the European Commission and later global strategist at AIG) says the rot began in the mid-1990s when the Fed made its Faustian pact and opted for ever-falling real interest rates.

Any thoughts on how we get out of this mess?

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