The Swiss National Bank (SNB) shocked foreign exchange markets by setting a minimum exchange rate target of 1.20 Swiss francs to the euro yesterday, saying it would enforce it by buying foreign currency in unlimited quantities.
The move immediately knocked about 8 percent off the value of the Swiss franc, which had soared as investors used it as a safe haven from the eurozone’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 central bank said in a statement. “With immediate effect, it will no longer tolerate a euro-Swiss franc exchange rate below the minimum rate of SF1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.”
The bank added that even at a rate of SF1.20 to the euro, the franc was still too high and that it should continue to weaken.
“If the economic outlook and deflationary risks so require, the SNB will take further measures,” the bank said.
Soon after the announcement, the euro was trading at just above the SF1.20 target after earlier being at about SF1.10. The euro also rose against the US dollar and was trading at US$1.417.
“One will think twice about speculating against this target because the SNB is with its back against the wall. They’ve exploited all other options,” said Alessandro Bee, an economist at Bank Sarasin. “Short term its clearly positive because Swiss exporters get supported. Longer term, you could say it bears inflationary risks.”
The Swiss franc nearly touched parity with the common currency on Aug. 9. It fell 8.5 percent against the euro after the announcement to SF1.203 and also dipped almost 8 percent against the US dollar to US$0.8483.
To cushion the economy from a downturn as the strong Swiss franc hurts exports, the central bank cut an already low interest rate target to nil on Aug. 3. It is also boosting the amount of liquidity in the banking system and it had threatened further steps. Those measures had temporarily helped the franc weaken, falling about 18 percent to a seven-week low, but it jumped again last week as worries about the health of the global economy intensified, increasing pressure on the central bank to act again.
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