Swiss draw line in the sand to weaken franc

Sep 6, 2011, 2:48 a.m.
Swiss franc banknotes of several values are sorted in a money counter in a bank in Zurich August 16, 2011. REUTERS/Arnd Wiegmann

By Emma Thomasson and Catherine Bosley

ZURICH (Reuters) - The Swiss National Bank shocked foreign exchange markets by setting a minimum exchange rate target of 1.20 francs to the euro on Tuesday, knocking back a currency rally which has threatened its economy with recession.

Using some of the strongest language by a central bank in the modern era, the SNB said it would buy other currencies in unlimited quantities and use all means within its power to hold to the target.

The move immediately knocked around 8 percent off the value of the franc, which has 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.

"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 statement.

"The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities."

The move prompted speculation that Japan might follow suit to cap the rising yen, which is also regarded as a safe haven and which could derail a recovery from the March earthquake and tsunami that tipped the country into recession.

"Japan ... will probably bring up the strong yen as a topic at the G7 meeting this weekend," said Koichi Haji, chief economist at the NLI research institute in Tokyo. "It will try to seek understanding from G7 counterparts to intervene unilaterally."

The SNB, which holds its quarterly monetary policy review on Sep. 15, added that even at a rate of 1.20 to the euro, the franc was still high and should continue to weaken over time.

"If the economic outlook and deflationary risks so require, the SNB will take further measures," it said.

The SNB has warned that economic growth -- still a healthy 2.3 percent in the second quarter -- is set to slow sharply in the coming months as the strong franc makes Swiss exports -- from luxury watches to drugs -- prohibitively expensive.

The franc nearly touched parity with the common currency on August 9. It fell 8.5 percent against the euro after the announcement to 1.203 francs at 0821 GMT and also dipped almost 8 percent against the dollar to 0.8483.

"That was the single largest foreign exchange move I have ever seen," said World First chief economist Jeremy Cook. "This dwarfs moves seen post Lehman Brothers, 7/7, and other major geo-political events in the past decade."

The European Central Bank said the SNB had made the decision of its own accord. Last month, ECB President Jean-Claude Trichet urged countries not to go it alone with currency interventions but rather take any action as a group.


Analysts said the SNB should be able to defend the level of 1.20 francs per euro but its success depended on efforts to deal with the euro zone's debt problems.

"In the very probable event that the eurozone crisis worsens in the coming months, intervention could be very costly for the SNB," said Rabobank senior currency strategist Jane Foley.

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