philipp hildebrand : developments in the international financial markets and managing the swiss national bank ’ s assets introductory remarks by dr philipp hildebrand, member of the governing board of the swiss national bank, at the end - of - year media news conference, zurich, 16 december 2004. * 1. * * developments in the international financial markets looking back at the year gone by, it becomes evident that two opposing price movements have dominated the markets : the strong depreciation of the us dollar on the one hand and the sharp rise in oil prices on the other hand. developments in the bond and equity markets were, by comparison, rather restrained. in the past few weeks, the dollar has continued its downtrend that commenced three years ago, at which time the greenback was still worth over chf 1. 70. given the structurally inflated us current account deficit, the sustained downward revision comes as no surprise. however, the fact that the revision to date has been relatively one - sided vis - a - vis the european currencies and the canadian dollar is problematic. major asian currencies have either remained completely pegged to the dollar, such as the chinese renminbi, or joined the dollar in its slide - at least to some extent - like the japanese yen. this was only possible, however, at a price, namely huge dollar - buying efforts on the part of the central banks and governments in question. as a result of this asymmetric trend, european exporters are currently bearing the brunt of the additional competitive pressures stemming from the weaker dollar. the swiss export industry is understandably especially keen to see that the franc is not exposed to any further revaluations against the euro. sudden and precipitous adjustments to the exchange rates are also undesirable from a monetary policy perspective. the unrelenting rise in oil prices surprised many market analysts. since the beginning of 2004, the dollar price of west texas intermediate crude oil has climbed by more than 50 %. in real terms, however, the ascent was not nearly as sharp as in earlier oil price shocks. in europe, the hike was further cushioned by the erosion of the dollar. the reasons behind the bullish oil prices are manifold. the main trigger, however, is likely to have been the structural increase in demand coming from the emerging economies, particularly from china and india. in addition, supply flexibility is currently quite weak, as investment spending in the drilling, transportation and storage of

more diversified and are also partially hedged against exchange rate risks. around half of the free assets are currently exposed to currency risks. the risks relating to the national bank ’ s assets are primarily assessed and monitored using the value - at - risk method. moreover, a number of different stress analyses are increasingly being carried out. in risk measurement, it is taken into account that the investment horizon, in particular for the monetary reserves, is a long - term one. where monetary assets are concerned, gold price and exchange rate risks - notably those on the dollar - play a decisive role. interest rate risks, while significant in their own right, are quite small by comparison. the overall risk with free assets is considerably lower. on the whole, the credit risks are relatively small. the national bank ’ s investments are valued daily at market prices, thus making it possible to form an up - to - date impression of the earnings situation. owing to the high degree of risk exposure to the gold price, the exchange rate and the interest rate level, the earnings situation can change dramatically from quarter to quarter and year to year. in this year alone, the quarterly returns on total assets fluctuated between + 2. 7 % and - 3. 2 %. so far this year, the national bank ’ s assets have yielded 1. 3 % overall. given its long - term investment horizon, short - term fluctuations generally do not present a problem to the national bank. the long - run yield is of greater importance. in the past five years, the national bank has achieved an average yield of 2. 9 %. this more or less corresponds to the earnings forecasts underlying the agreement between the swiss confederation and the national bank regarding the distribution of profits. 2 / 2