One of the most interesting things about fiat currencies is that no country wants to have a stronger one. Or the strongest one.
The power to devalue a currency in times of need has always been a privilege for central banks and countries in times of economic recessions. For this reason, and not only, the Euro as a common currency was viewed with skeptical eyes by economists all over the world. After all, giving your sovereignty away in the form of your national currency means to give away the possibility to intervene to support the economy in a recession.
Some other economists argue that this is exactly the reason why the Euro was a good idea. By taking away the power of national banks to issue new currencies to finance debt, the European economies will strengthen together. If that is a success or not, it is a different story. What is more important is that no one wants a strong currency – not even the ECB, that expressed its worries when the EURUSD rate reached 1.20 earlier this year.
Because exchange rates reflect one currency in terms of another, inevitably, some currencies end up stronger than others. Unsurprisingly, the CHF and the JPY have emerged as the stronghold currencies during the COVID-19 pandemic.
The Irony of Currency Strength
A currency reflects the trust of populations and businesses in the ability of the central bank to maintain its purchasing power. Thus, it is at least ironic that central banks want to weaken the purchasing power of their currencies. However, monetary policy is more complex than that.
If we are to consider the two, the CHF and the JPY, the CHF emerges as the strongest currency in the world in 2020. Imagine that the Swiss National Bank (SNB) constantly intervenes in supporting its depreciation. More precisely, in 2020 alone, it spent tens of billions of CHF in a desperate attempt to weaken the Swiss Franc. And, probably, will have to spend some more.
What is interesting is that the demand for CHF comes in the context of the SNB having the lowest interest rate in the developed world. It has set the policy rate at -0.75% for several years now, and even applies it to deposits bigger than CHF100k. However, the measures did not stop the international appetite for CHF, as investors bid for the safe-haven status provided by the currency.
To sum up, the CHF is likely the strongest among its peers in 2020. Yet all that is left in the last century of its purchasing power when compared to gold is around 5% .