Switzerland Pegs Franc To The Euro

By: EW News Desk Team   Date: 7 September 2011

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EW News Desk Team

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07 September 2011

 Concerned that the soaring franc would jeopardize its export market, Switzerland's central bank yesterday pegged the franc to the euro and said it was prepared to spend an "unlimited" amount to defend the Swiss currency. This move effectively devalues the franc and brings about new fears of a currency war. 

The Swiss franc, long considered a haven in times of crisis, had surged against the euro and the dollar this year as investors fled turmoil in the markets. That raised concern that Swiss exporters will be priced out of the market. 

“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 Swiss National Bank said. The central bank added it “is therefore aiming for a substantial and sustained weakening of the Swiss franc.”

The central bank “will no longer tolerate” an exchange rate below 1.20 francs to the euro, according to the unusually strongly worded statement, and “will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.”

This is not the first time the Swiss central bank has employed such a strategy to contain the franc, having used a similar operation in the late 1970s to weaken the currency against the Deutsche mark. 

The move stunned currency traders, and sent the Swiss franc tumbling against other currencies. Jeremy Cook, chief economist at currency brokers World First, said it was "intervention on a grand scale", and the start of a "new battle in the currency wars".

"That was the single largest foreign exchange move I have ever seen … The Swiss franc has lost close on 9% in the past 15 minutes. This dwarfs moves seen post-Lehman brothers, 7/7, and other major geo-political events in the past decade," Cook told the Guardian.
 

Just last month, the Swiss National Bank pledged to maintain its near zero interest rates and to increase the supply of Swiss francs available to traders. Yet, this move did not succeed in weakening the currency.

The Japanese yen has also been pushed higher since the financial crisis began, hurting the country's exporters and prompting Japan's central bank to launch its own interventions.

Related: Japan Intervenes To Prevent "Over-Valued" Yen From Rising Further

Louise Cooper, markets analyst at BGC Partners, warned that central banks do not have unlimited power – as the UK learned during Black Wednesday in September 1992.

"The Japanese example with yen intervention teaches us that intervention can work in the very short term but changing long-term global currency flows is near impossible – a lesson that the UK learned from George Soros," Cooper said.

Source: The Guardian, The Wall Street Journal, NYT


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