The Swiss monetary authorities took drastic action to bring down the value of the Swiss franc yesterday in a move designed to protect the nation's exporters and avert a domestic recession. The Swiss National Bank (SNB) announced that it would buy foreign currency in "unlimited quantities" in order to bring the exchange rate down to a target of 1.20 francs to the euro. There were immediate results, with the euro rising 8.3 per cent in value from 1.10 francs before the announcement to 1.21 immediately after.
"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 its statement. "The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities."
Investors, alarmed by fears over eurozone sovereign debt and the prospect of a global economic slowdown, have surged into Swiss francs over in recent months as part of the international flight into perceived "safe" assets. Since the beginning of 2010, the franc has increased by around 20 per cent against the euro and the dollar. Last month it reached a record high of SFr1.0075.
The Swiss stock market received a boost from the news of the currency intervention. But other exchanges across Europe, despite a strong morning, fell back yesterday afternoon as fears over the unresolved eurozone debt crisis reasserted themselves.
The Swiss currency move will open up another front of economic uncertainty for investors. There is negligible risk of inflation in Switzerland since demand for the currency is strong. But other central banks might now feel the need to intervene heavily in currency markets in order to prevent their own currencies appreciating.
A year ago, Guido Mantega, Brazil's Finance Minister, warned that an "international currency war" had broken out after interventions by Japan, South Korea and Taiwan to lower theirexchange rates. Brazil's central bank then unveiled its own measures.Reuse content