Question

Does the jump in the franc's value against the euro after leaving the peg indicate whether the franc was under- or overvalued? Explain your answer

Answer 1

After the peg was removed, the franc jumped against major currencies like the US dollar and the euro.

This indicates that during the peg, the Swiss franc was undervalued.

As the peg was lifted, its value rose to its true value.

The Euro zone had been witnessing a lot of problems, including economic, political and civil. Due to this, the euro had been facing downward pressure. Due the peg, the franc also had to keep its value low. While on the other hand, the demand for the franc was rising as investors look at Switzerland as a safe destination.

Thus, after the peg, the value of the franc increased and reached a much higher value. This indicates it was undervalued earlier (as compared to the euro).