The euro struggled yesterday in Asia after plunging in reaction to Switzerland’s surprise decision to remove its currency peg against the unit, sending investors fleeing for safer currencies.
Markets were blindsided on Thursday when the Swiss National Bank (SNB) said it would scrap its 1.20 Swiss franc link to the euro, which had been in place since the height of the European debt crisis three years ago.
The SNB had been defending the exchange rate since September 2011 in an effort to protect the country’s vital export and tourism industries, even buying massive quantities of foreign currencies to do so.
Photo: AFP
More recently, the Russian ruble crisis put renewed pressure on the franc.
The news immediately sent the Swiss currency surging 30 percent to SF0.8517 against the euro at one point on Thursday, before ending the day at SF1.0035. In Tokyo yesterday, the franc rose again to SF0.9945 against the euro before settling back at SF1.0012 by late afternoon.
The announcement also sent the US dollar falling to US$0.8597 against the franc from US$1.0193. By late afternoon in Tokyo, the greenback recovered slightly to US$0.8697.
“It’s normal for [the Russian] ruble to do this kind of thing, but we’re talking about Swiss franc,” US-based Merk Investments founder and president Axel Merk told Bloomberg News. “That’s quite extraordinary and unheard of.”
The huge volatility hammered a New Zealand currency brokerage, which said it would close in the wake of the dramatic Swiss move.
“The majority of clients in a franc position were on the losing side and sustained losses amounting to far greater than their account equity,” Global Brokers NZ Ltd (GBL) director David Johnson said in a statement dated on Thursday and posted on the Web site of affiliated company Excel Markets.
“When a client cannot cover their losses it is passed onto us. GBL can no longer meet regulatory minimum capitalization requirements ... and will not be able to resume business,” the statement said.
In Asia, the yen — seen as a safe bet in times of turmoil or uncertainty — picked up pace in the morning, with the dollar falling to ￥115.96 from ￥116.25 in New York and well down from ￥117.70 in Tokyo earlier on Thursday.
However, the greenback recovered some lost ground with the unit at ￥116.64 in the afternoon.
The euro edged up to US$1.1632 and ￥135.68, against US$1.1623 and ￥135.12. However, it was well down from US$1.1773 and ￥138.64 on Thursday before the SNB move.
IMF managing director Christine Lagarde called the move in a CNBC television interview “a bit of a surprise,” and said that she had not been informed in advance of the Swiss decision.
“I’m going to reserve judgment on the pertinence of that move, because we haven’t discussed it with [SNB] Governor [Thomas] Jordan,” Lagarde said.
Lagarde also acknowledged that she had not been informed in advance of the Swiss decision. “I find a bit surprising that he didn’t contact me,” she said.
“I would hope that it was communicated with other colleagues of central banks. I’m not sure it was,” she added.
Asked about whether the Swiss action risks sparking a currency war, the IMF chief predicted “more volatility” on the forex markets due to the divergent economic outlooks that major central banks are facing.
The US Federal Reserve is expected to raise US interest rates this year from near zero, where they have been pegged since December 2008 to support the economy’s recovery from deep recession. The Fed ended its massive asset-purchase stimulus program, or quantitative easing, in October last year on signs the economy is back on a moderate growth path.
By contrast, the European Central Bank is widely expected to launch a QE program at its next policy meeting on Thursday to counter deflation and weak growth in the shared-currency bloc.
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