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Seeking safety in the Swiss
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January 15, 1999: 12:12 p.m. ET
As euro grace period ends and Brazil erupts, Swiss franc lures fleeing capital
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LONDON (CNNfn) - With Brazil's economy careering out of control, safe-haven buyers are finding solace in a trusty old stand-by: the Swiss franc.
Much to the dismay of the country's banking chiefs, Switzerland's national currency has in recent sessions outflanked the euro as investors' parking place of choice for their fixed-income assets.
In investors' eyes, the newborn euro is a poor substitute for the bygone German mark, which in days past easily absorbed outflows of capital from stricken areas of the world.
That's because whereas the mark traded in a single country, the euro's sphere of monetary influence embraces 11 countries, including a few like Spain and Italy which have heavy exposure to Brazil.
The upshot, analysts say, is a perception that the euro may be wobblier on its feet until the crisis passes than the stolid Swiss franc, which has edged up steadily against both the dollar and euro in recent days.
"Europe has a much greater banking sector exposure to Brazil than the U.S.," said David Coleman, the chief economist of CIBC Oppenheimer, based in London.
In the first half of 1998, the most recent period for which figures are available, European exposure to the Brazilian market totaled $37.645 billion versus $16.77 billion for the United States, according to the Bank for International Settlements.
"If there are some question marks about the euro," Coleman added, "it would enhance the effectiveness of the Swiss franc."
The Swiss franc has progressively firmed against the euro since the Brazil crisis erupted Wednesday, though some of the currency's gains were pared Friday.
On Thursday, the franc traded at 1.5875 against the euro, up from 1.165 on Jan. 5 , just four days after the launch of the common European currency. By Friday afternoon, the euro had recouped some lost ground, as the franc slipped to 1.5978.
Analysts say the Swiss currency is unlikely to fall below a pain threshold of 1.57 to the euro before Swiss banking officials intervene to thwart a further firming.
In the past, the Swiss banking authorities have expressed their staunch objections to seeing the franc become a safe haven of choice. In November, the bank's vice president said the SNB wouldn't rule out the possibility of intervening on foreign exchange and money markets to keep the franc from becoming too strong.
On Friday, an SNB spokesman quoted by Reuters reiterated his displeasure at the latest turn of events.
"It's certainly not a development we welcome, but it is rather the result of overall nervousness, especially in relation to Brazil, rather than a statement of the market on the euro as such as a currency," the spokesman said.
Bronwyn Curtis, the chief economist at Nomura Securities, said the Swiss frown on the higher interest rates that typically accompany a stronger currency.
"They don't want such a strong currency, and especially not against a big block like the euro, because it causes all sorts of problems in managing their own economy," Curtis said.
The cold-shouldering of the euro in favor of the Swiss franc could have other consequences for Europe, economists say.
"This sort of development is exactly the sort of thing that will bring forward the timing of the next rate cut," said Don Smith of HSBC.
Late last month, prior to the euro's launch, the ECB set its interest rate boundaries between 2 percent and 4.5 percent, with the key short-term rate remaining at 3 percent. At the time, bank chief Wim Duisenberg warned that rates would be kept within that narrow range.
But some economists have privately predicted the ECB will lop off about 25 basis points in February and another 25 points in April as the European economic growth continues to slow.
Significantly, another prominent outcast from the euro zone -- the British pound sterling - hasn't benefited from the flight of capital from emerging markets.
"Sterling still suffers from an association with the dollar," Smith said.
Vicky Pryce, the chief economist at KPMG, cautioned against reading too much into the ascendancy of the Swiss franc in a time of economic turmoil in Brazil.
She said the Swiss franc likely will remain a reserve currency of choice until the euro market gains enough liquidity to foster widespread investor confidence, a process that could take three to five years.
"In the meantime," Pryce said, "currencies like the Swiss franc will be used every now and then when there are crises."
Looking ahead, Pryce said, one concern will lie in interest rate policies. "If you're only left with the euro and the dollar, there is going to be volatility between the two." 
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