Swiss draw line in the sand to cap runaway franc

Sep 6, 2011, 6:50 a.m.
Various Euro banknotes next to various Swiss Franc notes at a bank in Warsaw, July 18, 2011. REUTERS/Kacper Pempel/File

Swiss stocks, hurt of late by the strong franc, jumped, with the blue-chip SMI index trading up 4.3 percent.


"It will be the direction taken by the euro zone crisis that will determine how successful the SNB will be in protecting the Swiss franc from strength in the coming months," said Rabobank senior currency strategist Jane Foley.

The SNB also set a formal exchange rate target in 1978 -- above 0.80 francs per German Mark -- when the franc was soaring in the aftermath of an oil crisis, and successfully defended that rate, but at the price of soaring inflation.

"It worked in the short term, but it came at an enormous cost and led to a huge burst of inflation," said Simon Derrick, head of currency research at Bank of New York Mellon.

"The move now should work in the short term, but in the long term they are providing investors who are looking to exit the euro zone debt crisis with an easy route."

The SNB move came just after data showed Swiss inflation eased by more than expected in August, dipping 0.3 percent from a month earlier, lower than a median forecast in a Reuters poll for a fall of 0.1 percent.

The SNB temporarily managed to weaken the franc last month after it cut an already low interest rate target to nil on August 3 and boosted the amount of liquidity in the banking system. But the currency jumped again last week as worries about the health of the global economy intensified.

The SNB is seen in a strong position to follow through on the new target after top Swiss politicians and business groups expressed support for the central bank as the economy flags.

Such political solidarity is in contrast to earlier this year when the central bank came under fire for running up a huge loss in 2010 trying to keep a lid on the franc, prompting calls for SNB chairman Philipp Hildebrand to resign.

"Political support for this measure is much higher now than last year, given the extreme moves in the franc in recent months. This likely implies a stronger commitment than during the 2010 intervention," said Goldman Sachs forex research head Thomas Stolper.

The SNB's forex holdings had already surged to 253.4 billion francs in August as a result of foreign exchange swaps the SNB launched to ease the franc.

Swiss Economy Minster Johann Schneider-Ammann, who has proposed 870 million francs in government aid to counter the impact of the franc, welcomed the SNB action: " "It has a material impact and especially a psychological impact." [ID:nWEA3292]

The strong franc has started to dampen exports, hurting companies like specialty chemicals maker Clariant AG which cut its 2011 sales target on Monday, while the tourism sector is also suffering as foreign visitors stay away.

"The strong national currency is presenting existential problems not only to the export sector and tourism but the whole Swiss economy," Gerold Buehrer, president of business lobby group Economiesuisse, said in a statement.

"It is central that politicians and business stand united behind the national bank."

The SNB step should also help economies in eastern Europe with two-thirds of mortgages in Hungary and about half of Poland's denominated in Swiss francs.

"This unusual step by the Swiss National Bank should be seen positively," said UniCredit unit Bank Austria, the leading lender in emerging Europe.

But it added: "For the holders of foreign currency loans this is by no means the all-clear."

(Additional reporting by Katie Reid; Editing by Hugh Lawson)

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