The global currency war is fought with big guns, as the Swiss National Bank showed Tuesday with its decision to tie the value of the franc to the euro.
But it's also a campaign waged by stealth.
With evidence that the global economy quickly is losing momentum, there's every reason to pause and reassess. Yet the most pressing reason for these central banks to hold back is the same reason the Swiss central bank implemented a fixed exchange rate for the first time since the 1970's.
Even the hint of higher interest rests would exert upward pressure on the Australian and Canadian dollars and the Swedish krona. These are smaller, open economies that count on exports to generate wealth beyond what can be created by their domestic populations. With global demand waning, a stronger currency will only make things worse for these economies.
Switzerland's aggressive move Tuesday put a group of central banks on the defensive. The Swiss central bank was responding to skittish investors, who are looking for safe ports of call amid signals that the U.S. economy is drifting toward a recession and the European debt crisis is deepening. The yen is a popular choice, but the government's willingness to intervene makes the Japanese currency a risky bet. Same can now be said for the Swiss franc, another popular haven. Yet international investors' desire to steer clear of the U.S. dollar the euro is undiminished. That means they will be looking for other options.
High on the list of secondary havens are the dollars of Australia and Canada and Swedish krona. Nomura Securities this week published a ranking of the world's haven currencies, based government stability, the government's balance sheet, the flexibility of the currency and a country's resilience to shocks.
Nomura's Top Five are the U.S. dollar, the yen, the euro, the British pound and the Swiss franc. Next on the list is Canada, thanks to its top ranking for macroeconomic and political stability, ahead of Norway, Switzerland, Singapore and Sweden.
Australia is No. 7 on the haven list, just ahead of its neighbour, New Zealand. No. 9: Sweden. No. 10 is Norway.
So until global markets settle, there's every reason to expect the central banks of these secondary havens to risk a little domestic inflation and leave their benchmark rates on hold.
It beats printing money to maintain a peg.
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