Swiss gloves come off in battle over value of franc
National Bank's pledge to ease its exchange rate raises spectre of new round of international currency wars
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 get the exchange rate up to a target of Sfr1.20 to the euro. There were immediate results, with the euro rising 8.3 per cent in value from Sfr1.10 before the announcement to Sfr1.21 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 bank said. "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 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 against the euro.
This has had the side effect of making Swiss-made products more expensive abroad. Around 50 per cent of Swiss products are exported. A fall in exports was blamed for the recent slowdown of the Swiss economy in the second quarter of 2011.
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 in response to the Swiss move.
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 their exchange rates. Brazil's central bank unveiled measures designed to reduce the value of the real in January.
Yunosuke Ikeda, of Nomura Securities, said the Swiss move would embolden the Tokyo central bank to intervene to bring down the value of the yen: "The Japanese authorities are likely to think that it would be easier to conduct yen-selling intervention if speculative yen-buying strengthens." David Bloom, the global head of foreign exchange strategy at HSBC said: "Central banks have shifted to exchange rate policy aiming to have the weakest currency in town. This is a game that everyone can't win."
The Swiss authorities have been increasingly concerned by the strengthening of the franc over the past 18 months. The SNB quadrupled its foreign currency holdings in June 2010. And last month, in a further attempt to weaken the currency, the SNB announced that it would increase the cash available to its banks from Sfr120bn to Sfr200bn. But despite these efforts, the franc continued to strengthen against the euro.
- 1 Forget 'The Dress': Here are five of the biggest news stories you might have missed
- 2 The black and blue dress: Makers considering a white and gold version
- 3 PornHub turns masturbation into energy in bid to save the planet
- 5 Saudi Muslim cleric claims the Earth is 'stationary' and the sun rotates around it
British are sexually uptight, dirty and drink too much – according to Spanish book
PornHub turns masturbation into energy in bid to save the planet
Ukraine crisis: Top Chinese diplomat backs Putin and says West should 'abandon zero-sum mentality'
White and gold or blue and black – what colour is the dress? An eyewitness gives a definitive answer
Saudi Muslim cleric claims the Earth is 'stationary' and the sun rotates around it
New theory could prove how life began and disprove God
This is what it's like to be dead, according to a guy who died for a bit
'Cash for access' scandal: Sir Malcolm Rifkind says 'unrealistic' for MPs to live on £67,000 salary
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Ukip would cut billions from Scottish budget to fund English tax cuts
Russia's roadmap for annexing eastern Ukraine 'leaked from Vladimir Putin's office'
iJobs Money & Business
£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...
£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...
£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...
£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...