Sunday, January 24, 2010

Why the Swiss Franc is my Favorite US Dollar Barometer

Whenever I analyze the value of the dollar, either on its own or as a benchmark to compare with one or more commodities, I almost always use the US Dollar/Swiss Franc exchange rate (USD/CHF), which is the number of Swiss Francs you can get for one dollar. This may strike some people as strange, insofar as there exists another instrument, the US Dollar Index, which is designed specifically to provide a snapshot of the dollar's global worth. The USDX, as it's called, compares the dollar to a weighted basket of other world currencies, specifically the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc. The idea is that by having a basket such as this, the effects of bi-national issues on currency prices should be minimized by the other currencies in the basket. It's a good enough barometer for most cases, but there's a few reasons why I prefer the Swiss Franc:
  1. The weighting of the currencies, though based on real economic data, is somewhat arbitrary. Currently for example, 57.6% of the weighting falls to the Euro, as it was determined that that percentage is how much the dollar is affected by that currency. If geopolitical relationships were to change at all, that 57.6% (or any other weighting) becomes less meaningful.
  2. Since most of what I'm writing about concerns comparisons of the dollar's strength with commodity values, I need a barometer that can gauge the dollar's worth in global commerce. Surprisingly, the USDX is not the index used to gauge how strong the dollar is in global trade; that honor falls to the Trade-Weighted US Dollar Index, which is a basket of about 27 or so foreign currencies, weighted by trade volume with the United States, and adjusted annually as trade volumes change year to year. You might think that this index would make a better currency barometer, but the fact that it's changing every single year actually makes it difficult to use when gauging long-term trends. Within a single year it's great, but otherwise you run into consistency problems.
  3. This is a bit more of an aesthetic reason, but the USDX is not a real currency. Like all indices, it had to be assigned an arbitrary starting value on a given date which, in this case, happens to be 100 as of March, 1973. So, when I read that the USDX is trading at 78, that means that the dollar is 22% weaker today against an oddly weighted basket of currencies than it was in March 1973. Sweet, good to know. No, when considering the value of the dollar, I want a tangible gauge. I want to know how many units of another nation's currency my hard-earned greenback will actually buy me. I can't walk into a bank tomorrow and say: "I'd like to exchange $100 for 57.8% Euros, 13.6% Yen, 11.9% Pounds Sterling, etc. etc." Well, I guess I could, but I'd look like an idiot.
All of that explains why I prefer not to use the USDX, but why the Swiss Franc? The nation of Switzerland has basically two major economic sectors (three if you count cheese with holes in it): high-end watches, and banking. The country is essentially a giant bank. Its historic neutrality protects it from major geopolitical upheaval and it's terrain makes it largely impenetrable in the event of a new world conflict. Its vast stores of gold give the economy a fundamental and irrefutable value, while its conservative approach to asset management make it's currency extremely stable. Because of Switzerland's limited industrial focus, the United States will almost never be in any sort of trade dispute with the country, unlike, say, with the EU, Japan, China, England, or even Canada, where trade relationships are intricate and new regulations, national or international, can have more dramatic effects on currency values. Because of Switzerland's unique status on the world stage, its exchange rate with the dollar truly lets you know how much the dollar is worth to the rest of the world.
I've been to Switzerland twice, it's a beautiful country, one I hope to return to some day. On my most recent trip there (in 2005) I held onto a SFr 5.00 coin, which today sits on my night stand and which I'll occasionally throw into my pocket if I need a bit of good luck. It is my favorite piece of legal tender I've ever possessed; hefty but not too bulky with beautiful engraving on each side. At the time I acquired it, the coin was worth about $3.85, as of this writing, it's worth about $4.80. Given what's happened to the US Economy between 2005 and 2010, that seems just about right.


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Charles said...

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Thanks, I think.