This essay includes detailed analysis and evaluation of the possible reasons for the change in the value of the swiss franc against the euro. Reasons include the increase in the demand for the swiss assets and lower relative interest rates.
Evaluate possible reasons for the change in the value of the Swiss Franc against the Euro.
Disinflation is a fall in the rate of inflation. It occurs when the general price level is rising at a
slower rate. As seen in figure 1, the Eurozone CPI rate of inflation saw a fall in inflation from
the beginning of 2012 until the end of 2014, from 3% to 0%. Therefore, the Eurozone
experienced disinflation. Whereas deflation is when the rate of inflation is negative. It
occurs when the general price level is declining. In can be seen from figure 1 that in 2015
the inflation rate fell below 0%. Hence, the Eurozone experienced deflation.
One possible reason for the change in
the value of the Swiss Franc against the
Euro during 2010 was due to the increase
in the demand of Swiss assets. During the
Eurozone crisis, investors lost confidence
in the Eurozone market and looked
towards investing in the Swiss market
instead. Line 3 of extract 1 states “Swiss
assets were considered to be safe so
investors bought more of them.” This led
to a rise in the inflow of funds into the
country. As a result of this, there was an
increase in the demand for the Swiss Franc, thus, leading to an appreciation. In the diagram
above, the initial equilibrium point is at P1Q1. Due to an increase in the demand for the
Franc, the demand curve shifts to the right from D1 to D2. A rightwards shift in the demand
curve results in an increase in price from P1 to P2 and an increase in quantity from Q1 to
Q2. The new equilibrium point is now at P2Q2. Therefore, due to an increase in the demand
for the Franc, it became stronger than before against the Euro. However, if investors were
to regain confidence and looked towards reinvesting into the eurozone market, this may
cause the franc to depreciate. This is because, investors are likely to sell their francs and
purchase more euros instead. This increases the supply of francs in the market, thus causing
it to depreciate, whereas there would be an increase in the demand for euros, causing it to
appreciate. Hence, the franc would weaken in value against the euro.
Another possible reason for the change in the Swiss franc against the Euro may be due to
lower relative inflation rates. Lower relative inflation rates result in exports to foreign
countries becoming cheaper, which then causes an increase in the demand for exports. As a
result of increased demand for exports, this leads to a rise in the demand for the Franc as
well. Consequently, Switzerland will see an appreciation in the Franc. Whereas the Eurozone
has a relatively higher inflation rate compared to Switzerland. Hence, exported goods from
the eurozone are comparatively more expensive and as a result of this the demand for
eurozone exports will decline. A drop in the demand for exports will then cause the Euro to
depreciate as the demand for it falls. Therefore, as a consequence of a lower relative
inflation rate, the Franc began to increase in value during 2010. However, as the franc
appreciates, workers are likely to demand higher wages. Higher wages will increase the cost
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