September 6, 2011
Swiss draw line in the sand to cap runaway franc
The Swiss National Bank shocked markets on Tuesday by setting an exchange rate cap on the soaring franc to stave off a recession, discouraging investors anxious about flagging global growth from using the currency as a safe haven.
Using some of the strongest language from a central bank in the modern era, the SNB said it would no longer tolerate an exchange rate below 1.20 francs to the euro and would defend the target by buying other currencies in unlimited quantities.
The move immediately knocked about 8 percent off the value of the franc, which had soared by a third since the collapse of Lehman Brothers in 2008 as investors used it as a safe haven from the euro zone's debt crisis and stock market turmoil.
Analysts said the SNB should be able to defend 1.20 as it can print unlimited francs but that long-term success depended on efforts to deal with the euro zone's debt problems given the relative strength of the Swiss economy and government finances.
"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 SNB said in a brief statement.
"The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities."
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The move was seen as a new shot in the currency wars, with Japan expected to try to weaken the yen if the Swiss action diverts more safe-haven inflows into the currency. Gold, which hit a record higher earlier on Tuesday, is also seen gaining.
Fears that the world economy may tip back into recession have spurred investors to dump riskier assets such as stocks and seek the relative safety of gold and the franc and yen.
"As the SNB's pockets are very deep, it should succeed in stabilizing the rate above 1.20," Commerzbank economist Ulrike Rondorf said.
"On the other hand, a further depreciation of the franc seems unlikely to us in the current climate. Uncertainty on the market is still very high, with no sign of the debt crisis in the euro zone abating at present," she said.
The SNB, which holds its quarterly monetary policy review on September 15, said that even at a rate of 1.20 to the euro, the franc was still high and should continue to weaken over time.
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