The dollar falls to a two-year low – what that means for tourists in Switzerland Body in freezer in Thailand: German suspect arrested

Ron and Lucy wait at the Zurich airport for their return flight to Miami after a little tour of Europe. “Traveling abroad was funnier last year,” says Ron, speaking of the exchange rate.

“Switzerland is expensive, but the dollar is also weak,” adds Lucy. In fact, the dollar has depreciated 10 percent against the Swiss franc over the past 12 months. But Greece, where the couple spent most of their two-week vacation, has also become more expensive for Americans. The US currency has become almost 10 percent lighter than the common currency.

Tourists feel loss of purchasing power

The 70 francs the two paid for the taxi ride from the center of Zurich to the airport was the highlight of their trip to Europe. But even in Athens, the same service at $40 was not cheap at all.

Americans feel the purchasing power of the dollar on their trips abroad, which they suffer from the strong price increases at home. For the price of a one-way trip in a Zurich airport taxi, a Swiss can afford a round-trip ticket in Miami.

According to economic theory, there should not be large real price differences between countries for identical services in the long run. If nominal prices don’t converge through trade, they should adjust through the exchange rate, according to the manual. According to the theory, the dollar should become significantly cheaper against the franc, but also against the euro.

Ron and Lucy clearly don’t realize that they actually have a strong dollar in their pocket. “Measured by purchasing power parity, the dollar is still massively overvalued,” said Daniel Kalt, chief economist at UBS. The equilibrium exchange rate is about 75 centimes per dollar.

On Wednesday, the franc/dollar exchange rate fell below 87 centimes for the first time in two years. It is the correction of an overvaluation, the origin of which has less to do with the situation in America than with that in Europe. The war in Ukraine left many US companies and other major international investors unable to leave more money than needed in Europe and the Eurozone.

Demand for the dollar was also supported by the US Federal Reserve’s resolute interest rate policy. Since March 2022, it has raised the key rate from near zero to 5.25 percent in May. As a result, the trade-weighted dollar rose to its highest level in 38 years in the fall.

“Markets are on the alert and concerned about whether and when the rise in interest rates in the US could turn into a recession,” said Daniel Kalt. US labor market data, which fell slightly short of expectations on Friday, significantly accelerated the dollar’s downward movement in the electrified environment. It can go on like this for a while.

US interest rates could rise even further

Kalt expects the US Federal Reserve to raise rates twice more in July and September after a lull in June amid the looming banking crisis. According to this, the key interest rate in the US would remain around 6 percent until the slowdown in economic activity slowed price developments.

UBS expects the dollar to reach 85 centimes within twelve months. “But in the longer term, the dollar could fall back below 80 centimes,” says Daniel Kalt. The US currency hit its all-time low against the Swiss franc in August 2011 by less than 73 centimes. That was shortly before the peak of the euro crisis, which was mainly characterized by a massive appreciation of the Swiss franc.

Last but not least, the constant appreciation of the Swiss franc against most foreign currencies is a vote of confidence in the National Bank. The Swiss central bank could manage inflation in its own country better than other central banks.

A more moderate development of wages and prices in an international comparison also allows the Swiss franc to appreciate without affecting the competitiveness of the Swiss economy. That this will succeed is also the current base scenario at UBS. The bank assumes that the SNB will raise the policy rate again to 2 percent in September and that economic growth will slow down this year and next year to 0.9 percent and 1.3 percent respectively. The UBS predicts that inflation dynamics will also be broken.

“The dollar is our currency, but your problem,” said former US Treasury Secretary John Connally in a fit of arrogance when the US broke the global Bretton Woods monetary system in 1971, ushering in a long period of high inflation. But Ron and Lucy are only now learning that the dollar could also be their problem. Or let’s put it this way: they just experienced an illusion of purchasing power during their vacation. The longer-term reality for US tourists and importers is less rosy. Of course, this is also our problem – but not the only one.