The Swiss currency, long considered a safe haven, has surged against the euro and the dollar this year as investors flee turmoil in the markets. That has raised fears among Swiss businesses that the country’s exporters will be priced out of major markets. Switzerland’s biggest trading partner is the European Union.
“The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development,” the Swiss National Bank said in a statement
. It said it “is therefore aiming for a substantial and sustained weakening of the Swiss franc.”
The central bank “will no longer tolerate” a euro-franc rate below a floor of 1.20 francs, it said, and “will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.”
The franc fell sharply, with the euro rallying to 1.20 Swiss francs from 1.11 francs late Monday. The dollar soared to 0.8483 Swiss franc from 0.7872 franc.
The euro has traded as low as 1.03 francs this summer.
The central bank’s new target commits it to buying euros and selling francs any time the euro falls below 1.20 francs. That amounts to the setting of a “floor” for the euro.
The authorities had also considered implementing a currency “peg,” in which the franc would be defended at a specific rate. In reality, considering the downward pressure on the euro, the 1.2 franc level will probably prove a de facto peg for the time being.
Currency market intervention, when it is not coordinated among the major central banks, has failed to have a lasting effect in recent years, as the Bank of Japan has learned to its chagrin.
Steven Saywell, head of global currency strategy at BNP Paribas in London, said he thought it “very unlikely” that the Swiss National Bank’s counterparts at the Federal Reserve and European Central Bank would be eager to follow suit, even though a Friday-Saturday meeting of Group of 7 finance and central bank officials in Marseilles would give them an opportunity to coordinate policy.
“The G-7 has far greater issues to deal with,” Mr. Saywell said, “like preventing the U.S. economy from sliding into recession and supporting the ongoing political discussions about addressing Europe’s debt problems.”
Indeed, the E.C.B. appeared to distance itself from the S.N.B. decision, saying in a two-sentence statement that the Swiss central bank had made the decision to hold down the value of the franc “under its own responsibility.”
Mr. Saywell said investors were certain to test Switzerland’s resolve, as the authorities there were attempting to buck a strong tide.
“In an environment of strong growth and economic stability, the franc might weaken,” he said. “But in this climate, we expect the market to challenge the S.N.B. over the next few days.”
The move is but the latest by the central bank in seeking to check the rise in the franc. Last month, it said that it would significantly increase the supply of liquidity to the Swiss franc money market. It increased banks’ sight deposits, a liquidity facility through which banks can withdraw money, to 120 billion francs from 80 billion francs. It also said it would conduct foreign exchange swap transactions to create liquidity in Swiss francs.
Even at a rate of 1.20 francs per euro, the central bank said Tuesday, “the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the S.N.B. will take further measures.”
The central bank’s action “is a bold move, but that level is still relatively high, implying that the economy will suffer nonetheless,” Jennifer McKeown, an economist with Capital Economics in London, wrote in a research note. “It sounds like, rather than using foreign exchange swaps to flood the market with francs as it has in the recent past, the bank plans to revert to its earlier strategy of intervening directly in currency markets.”
Ms. McKeown noted that the euro had averaged about closer to 1.7 francs over the long run, so “we suspect that Swiss exports will drop anyway, given the still relatively high level of the franc.”
Article source: http://feeds.nytimes.com/click.phdo?i=5bd8fa129636d4b06914e97b2243f7ce
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