Swiss Franc Pegged To Euro In Attempt To Protect Economy (Sep 2011)

swiss_franc

Source: The Guardian – Swiss bid to peg ‘safe haven’ franc to the euro stuns currency traders

Notable excerpts:

Switzerland sparked fears of a new currency war on Tuesday after it pegged the Swiss franc against the euro in an attempt to protect its economy from the European debt crisis.

The Swiss National Bank in effect devalued the franc, pledging to buy “unlimited quantities” of foreign currencies to force down its value. The SNB warned that it would no longer allow one Swiss franc to be worth more than €0.83 – equivalent to SFr1.20 to the euro – having watched the two currencies move closer to parity as Switzerland became a “safe haven” from the ravages of the eurozone crisis.

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 said.

The SNB pledged to enforce a “substantial and sustained weakening of the Swiss franc”, adding that it might move to an even lower exchange rate against the euro if needed.

“The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development,” said Switzerland’s central bank.

Back in April, one euro was worth SFr1.32. The strength of the Swiss franc has made the country’s exports much more expensive and harmed its tourism business, and also encouraged some Swiss residents to cross the border into Germany to do their shopping.

Last month, the SNB pledged to keep interest rates near zero and increase the supply of Swiss francs available to traders. This move did not succeed in weakening the currency.

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