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To peg its currency (CHF) to the Euro (EUR), the Swiss National Bank (SNB) made purchases of EUR to the tune of several hundred billion. By reducing the supply of EUR, the SNB made the EUR relatively valuable, achieving the peg.

But how did the SNB fund its EUR purchases? My original assumption was that the SNB simply printed CHF to buy EUR. Is this correct?

The reason I ask is (a) I have not been able to find explicit documentation of this and (b) a colleague suggested that the SNB may have been using other means to purchase EUR, such as tapping into gold reserves or other kinds of reserves.

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This quotation by Michael Bordo, Owen F Humpage, and Anna J Schwartz (2012) was the richest description I could find on how the SNB achieved the floor:

In March 2008, the Swiss National Bank eased monetary policy in response to expectations of deflation, deteriorating economic conditions, financial-market distress, and a Swiss franc appreciation that resulted from the global financial crisis. In conjunction with this action, the Bank aggressively bought euros in the foreign-exchange market in 2009. Throughout March and April 2009, the Swiss National Bank did not seem to sterilise its substantial foreign-exchange purchases; the Swiss monetary base rose by more than the value of foreign assets on the Bank’s books. In response, the Swiss franc depreciated. By April 2009, however, the Swiss monetary base had more than doubled from a year earlier, and the Bank – now concerned about latent inflation – began to sterilise the liquidity resulting from its huge interventions. The Swiss interventions continued through June 2010, but the Swiss monetary base either grew by less than the Swiss National Bank’s holdings of foreign assets, or the monetary base actually declined. The Bank was clearly sterilising the operations, and the franc appreciated by nearly 10% between April 2009 and June 2010. On balance, from May 2010 to August 2011, the Swiss monetary base contracted and the franc appreciated, reaching an historic high on a real trade-weighted basis.

In early August 2011, the Swiss National Bank announced a series of new measures to inject liquidity into financial markets with the objective of stemming the Swiss franc’s appreciation. The operations included foreign-exchange swaps in which the Bank sold francs spot and repurchased them forward. The franc depreciated sharply, but undertook a stunning reversal late in the month. The Swiss National Bank then announced that it was prepared to buy foreign exchange in unlimited quantities to maintain a floor of SF 1.20 vis-à-vis the euro. The Bank’s holdings of foreign exchange increased substantially, but the Swiss monetary base increased by even more. Since September, the Swiss National Bank has maintained an exchange-rate floor, by giving up control of its monetary base in conformity to the fundamental trilemma.

Foreign-exchange intervention and the fundamental trilemma of international finance: Notes for currency wars

If they are not controlling their monetary base they probably be doing standard currency interventions. That is, they credit their own accounts at banks with CHF, then using those credited accounts to purchase Euro denominated assets. Or perhaps, they enter into spot Euro-CHF FX transactions and use the proceeds to buy Euro denominated assets. If they were selling gold then they'd sell gold for dollars and buy euros with dollars. That might modestly move the Euro-USD exchange rate but would affect the Euro-CHF rate only indirectly. But the Swiss monetary base shouldn't be increasing.


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  • $\begingroup$ Interesting that even this seemingly authoritative source takes a somewhat speculative tone. I guess some of this is simply not public information. But an informative answer, regardless. $\endgroup$ – zkurtz Jan 21 '15 at 14:06
  • $\begingroup$ Why not buy EUR directly with gold? (Why involve USD?) $\endgroup$ – zkurtz Jan 21 '15 at 14:07
  • $\begingroup$ My understanding is that most commodities are priced in dollars so when you sell them you get dollars unless you do something special. For example, the London gold fix is in dollars (lbma.org.uk/pricing-and-statistics). $\endgroup$ – BKay Jan 21 '15 at 14:16

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