Shock in dollar interest and rising prices worldwide – that’s 250 million savings for Switzerland from lower drug prices

The stock markets fluctuate between euphoria and depression, sometimes just minutes in between. Whenever they convinced themselves that the US central bank, the Federal Reserve Bank (FED), will soon slow down in its fight against inflation, there have been small or large rallies.

That’s how it was in the summer, that’s how it was in October: stock prices rose, interest rates fell. When Fed chief Jerome Powell makes it clear that inflation is far from over, stock prices collapse. When Powell announced another interest rate decision this week, the stock market wondered if the same stock market drama would play out again.

In turn, the central banks of the eurozone, Japan and India also watched Powell with fascination. With its uniquely rapid turnaround in interest rates, it is pushing the dollar upward, resulting in what the chief economist of the Bank for International Settlements (BIS) calls a “double whammy” worldwide. And the question is whether this will also affect Switzerland. Consecutive.

The euphoria for the Powell speech

At the beginning of this week, investors in the financial markets still tended towards euphoria. In Switzerland, the blue chip index SMI had risen by more than 7 percent since the end of September. By contrast, ten-year government bond yields had fallen from nearly 1.5 percent to just over 1 percent. In summary, the Zürcher Kantonalbank wrote of “markedly higher share prices” and a “significant drop in yields”. It was almost euphoric, but that came to an end after Powell’s performance.

Powell initially implemented a jumbo rate hike of 0.75 percentage point, but everyone had expected that. Market traders waited for signals as to how Powell would proceed in the coming months. In the press release, they found a new phrase that made them even more euphoric. Interest rates seemed to indicate a turnaround that interest rates would not rise much higher. Share prices immediately skyrocketed and interest rates plummeted. But then came Powell’s speech.

The euphoria breaks away

Powell hit a double whammy: he will likely have to raise interest rates even more than markets expect; he will probably have to leave them there for a long time. And if the markets enveloped this too, Powell would strike a third time. It is better to act decisively against inflation, even if it causes a recession. When that happens, you have the resources to support the economy. “If, on the other hand, inflation solidifies, that would be a much bigger problem.”

The rest was crash, boom, bang: The Dow Jones stock index fell by 1.5 percent, the S&P 500 by 2.5 percent, and the Nasdaq index, which includes the major tech companies, even down 3.4 percent. A trend continued, which the New York Times described as follows: “Big Tech is getting beat up on Wall Street.” Facebook, which renamed itself Meta, is down more than 70 percent this year, while Amazon and Tesla are down more than 40 percent. All three have fallen from the illustrious circle of companies with a market value of $1 trillion. Microsoft, Apple and Google parent company Alphabet remained.

The appreciation of the big dollar

Powell’s speech fueled a trend that could become dangerous: the great appreciation of the dollar. The US currency is at its highest value in nearly four decades against a basket of other currencies (see chart). This is according to a new study by the BIS. And as a BIS economist told Bloomberg news agency, many countries are dealing with a double whammy.

Energy imports will be twice as expensive. Oil and gas have become more expensive anyway, as a result of the Russian-Ukrainian war and the boom after the corona crisis. And since oil and gas are traded in dollars, they are even more expensive for Indians, Japanese or Europeans. For every dollar they pay more rupees, yen or euros.

This double blow is unique, the BIS writes: in earlier phases of the dollar appreciation, commodities became cheaper and cheaper. And he comes at the wrong time. Inflation is already at record highs, for example in the eurozone, recently above 10 percent, the expensive dollar is also pushing up import prices – and with it inflation.

Stupid enough, you might think, but it could be a lot stupider – as the UK showed recently. The country is not mentioned in the BIS study. But it warns of “distortionary exchange rate movements” that will hit a country if it doesn’t have coherent monetary and fiscal policies.

As Prime Minister, Liz Truss announced massive fiscal packages to socially dampen inflation. In addition, she wanted huge tax cuts for the wealthy. How she wanted to pay for it – all she heard about was economic theories that had long been disproved. So investors raced for the exit, the pound fell and Truss was out of the office in record time.

The consequences for Switzerland

There is also an appreciation of the dollar against the franc: in one year the dollar has strengthened by 11 percent – ​​by 1 percent after Powell’s speech alone. But so far this has apparently had little impact on inflation in this country. In October, prices remained roughly the same as the previous month, according to the national consumer price index. Compared to last year, a decrease can even be observed: in August inflation was 3.5 percent, now it is 3 percent. For example, Switzerland looks like an inflation island of the lucky ones if you look at Germany, where people have to live with more than 10 percent. But does it stop there?

The strong dollar is not a threat to inflation – it could potentially become an economic risk. Here’s how economists’ ratings can be summed up: David Marmet, chief economist at ZKB, and Heiner Mikosch, chief of international affairs at the KOF Business Cycle Research Center at ETH Zurich. It is said that one should not only look back a year. The dollar is today at about the same level as it was before the corona crisis. Switzerland enjoys further protection from the appreciation of the dollar by generating much of its own energy from hydropower and nuclear power. After all, the dollar is much less important than the euro, as the eurozone is the most important trading partner.

Satisfied so far, but through the eurozone and other trading partners, the strong dollar could become an “economic risk”, says economist Mikosch. The dollar is increasing inflationary pressures in the eurozone, which could force the European Central Bank to tighten monetary policy – possibly bringing the economy to a standstill in the process. If this happened, the Swiss economy would also suffer and in the worst case there would be a recession. As Mikosch says: “As of today, however, we do not assume such a scenario.”

Goods in Switzerland have become more expensive compared to the previous year

The developments in the individual components of the national consumer price index over the past year are shown below.