thomas jordan : reconciling switzerland ’ s minimum exchange rate and current account surplus speech by mr thomas jordan, chairman of the governing board of the swiss national bank, at the peterson institute for international economics, washington dc, 8 october 2013. * * * introduction ladies and gentlemen, it is a great pleasure to be here at the peterson institute for international economics. before we start, i would like to personally thank the president of the peterson institute, adam posen, for the invitation. i will begin by asking two questions : first, is switzerland ’ s minimum exchange rate at odds with its longstanding current account surplus? second, is such a policy undermining the adjustment of global imbalances? i will argue that, in both cases, the answer is no. the swiss national bank set a minimum exchange rate of chf 1. 20 against the euro in september 2011. in so doing, it took action against an excessive strengthening of the swiss franc that was threatening price stability and the swiss economy. to illustrate the extent of the franc ’ s appreciation, let ’ s look at figure 1, which shows the real trade - weighted exchange rate on a monthly basis. as we can see, right from the onset of the financial crisis in 2007, the swiss franc strengthened significantly, and dramatically so in july 2011. between early july and early august alone, the swiss franc appreciated by roughly 20 %. 1 with interest rates close to zero and inflation forecasts signaling deflationary risks, the minimum exchange rate helped us avoid a dangerous tightening of monetary conditions, in a situation where we had exhausted the options available under conventional monetary policy. it also provided the foreign exchange market with clear guidance at a time of enormous uncertainty. the rationale for the introduction of the minimum exchange rate is internationally acknowledged. as i have seen over the last two years, particularly central banks and the imf understand the difficult situation facing switzerland in 2011. they also recognize that we set the minimum exchange rate at a level where the swiss franc remains highly valued even today. over the last few years, exchange rate tensions between the major economies have flared up. in this context, some observers have criticized central banks for influencing exchange rates, either directly through foreign currency purchases, or indirectly through additional monetary easing measures such as the purchase of securities. it is claimed that these types of asset purchases generate spillover effects or constitute a beggar - thy - neighbor policy. 2 in recent weeks, it has been suggested

##ity and return. important in this regard are the concentration on liquid investments, in other words readily marketable investments, and on the greatest possible risk diversification by holding different currencies and investment categories. the national bank ’ s leeway for investment has extended considerably since the entry into force of the new national bank act in may 2004. risk diversification options in particular were also increased as a result. the concrete investment structure of the different portfolios and their yields are published quarterly in an updated appendix to the investment policy guidelines of the swiss national bank. the current investment structure and the risk / earnings profile of the national bank ’ s assets, in particular the foreign currency reserves and free assets, can be summarised as follows : the portfolio adjustments made under the new act aim to increase diversification in terms of currency and investment category. within the context of the 2004 strategy, the dollar share was reduced in favour of the pound sterling and the yen. the weakening of the us currency resulted in a further decrease in the dollar ’ s share of foreign currency reserves. recently, in an effort to prevent the dollar ’ s share from dropping too low and with a view to rebalancing, we bought dollars again on a number of occasions. furthermore, as part of the 2004 strategy, the proportion of government bonds was also reduced in favour of other borrowers ’ bonds. the required minimum rating for bond investments was lowered from a2 to bbb, thus covering the entire “ investment grade ” range. corporate bonds have now also been added to the national bank ’ s investment universe, albeit only those of foreign companies. currently, roughly 4 % of both foreign currency reserves and free assets are invested in corporate bonds. the credit quality of all our investments is still very high. borrowers with the top rating aaa account for over 70 % of the investments. close to 20 % bear the aa rating. the remaining investments have an a or a bbb. the average residual maturity ( duration ) of all bonds held by the national bank was kept at 4 - 5 years. the first investments in equities issued exclusively by foreign companies will be made at the beginning of 2005. the addition of equities and corporate bonds is likely to improve the degree of diversification of the investments and will contribute to the achievement of slightly higher returns in the medium term. the main difference between the investment structures of foreign currency reserves and free assets is their currency profile. in the case of free assets, foreign currency investments are