Question

Switzerland is not a member of the Eurozone (nor the European Union), and its currency is considered a ‘safe haven’ currency. During the height of the Euro Crisis in 2011, Switzerland decided to peg its currency to the Euro at a rate of Swiss franc (CHF) 1.20 per 1 Euro. However, the Swiss franc soon became ‘undervalued’ at this pegged rate.

1) What does ‘undervalued’ mean in this context, and what actions did the Swiss Central Bank need to take to maintain the peg at Swiss franc 1.20/Euro in this case?

2) What were the costs to Switzerland of maintaining the Swiss franc peg at an undervalued rate which caused Switzerland to abandon the peg in 2015?

Answer 1