Pity Phillipp Hildebrand.
The head of the Swiss National Bank oversees an economy that counts on exports to generate half its gross domestic product. He also overseas a currency that investors consider an asset that will hold its value during times of global economic strife. This is one of those times, and traders can only buy so much gold. They are piling into the Swiss franc, sending its value to record highs in recent days.
Mr. Hildebrand finally pushed back Wednesday. He dropped the central bank's benchmark lending target to "as close to zero as possible" from 0.25 per cent and also signalled that it would inject the equivalent of $104-billion (U.S.) into the Swiss economy.
Predictably, the franc fell -- by as much as 3 per cent against the euro, reversing some of the 10 per cent gain over the past two months. That's why central bankers are so circumspect: they rely on shock value. Investors were taken totally by surprise because Mr. Hildebrand had been fully engaged in unwinding pervious stimulus measures that were directed at controlling the value of the currency.
However, few think the Swiss National Bank has won more than a temporary reprieve. The investors who got roughed up by Mr. Hildebrand's surprise attack will dust themselves off, survey a scene that is dominated by a debt crisis in Europe and an economic growth crisis in the U.S., and demand anew the protection of the franc.
Mr. Hildebrand fought the markets during the financial crisis and didn't come out so well. The Swiss National Bank increased its reserves to 239 billion francs in May, 2010, from 47 billion francs at the end of 2008 to little long-term effect. Direct intervention in currency markets of 130 billion francs between March and May of 2010 did little either, suggesting Mr. Hildebrand will shy away from trying it again, especially because his previous attempt resulted in politically uncomfortable paper losses on the value of the central bank's reserves.
Economists at Morgan Stanley say there are three things that could reverse the franc's ascent: a sharp improvement in the global risk environment, forceful steps by the European Union to chase away fears of sovereign defaults, and a Swiss economic recession that would cause the safe haven seekers to seek elsewhere.
"In short, none of these alternatives promise a significant near-term shift in (the franc's) fortunes," Morgan Stanley's Gabriel de Kock said in a research note.
At least Mr. Hildebrand isn't a lone. To a lesser degree, his old college friend, Bank of Canada Governor Mark Carney, shares in his distress, as do the heads of the central banks of Australia, New Zealand and Brazil.
But perhaps the most keen to start a support group would be officials at the Bank of Japan. The yen also is surging on the safe-haven bid, which is the last thing the country needs as it rebuilds from the natural and human disaster of earlier this year. "We want the BOJ to continue to support the economy," Japanese Prime Minister Naoto Kan said Wednesday on the eve of the central bank's two-day policy meeting.
The Japanese government also is threatening to intervene in currency markets to weaken the yen, a move that analysts say would provide short-term relief, but do little to reverse the upward pressure on the currency.
Is there really nothing that policy makers can do? Not exactly. They could for once put real pressure on China and other Asian economies who insist on managing the value of their currencies, and action that serves only to deflect capital to Switzerland and other countries who have commitment to open economies and sound policies.
"You have a large bloc of currencies that aren't trading in an equilibrium pattern…that exacerbates the problem," Robet Sinche of Royal Bank of Scotland said on Bloomberg Television Wednesday. "What you have is big capital build up that overwhelms small markets."