Wednesday, August 3, 2011


The Swiss franc fell rapidly against the euro and dollar Wednesday after the Swiss central bank surprised markets by introducing measures to tame the currency's strength after its recent surge to record highs.
The action succeeded in weakening the franc, but concerns remain over the long-term effectiveness of the policies. The Swiss currency plunged 2.6% against the euro and over 1.8% against the dollar after the Swiss National Bank said it will trim its key three-month London Interbank Offered Rate target to as close to zero as possible from 0.25%.
The euro traded recently at 1.1136 Swiss francs, up from a record low hit in Asia of 1.07946 francs. The dollar was trading at 0.77670 franc, compared with 0.7629 franc prior to the SNB's action.
The Swiss National Bank said the "current strength of the Swiss franc is threatening the development of the economy and increasing the downside risks to price stability in Switzerland."
As a result, the SNB also said in the coming days it will increase the supply of liquidity to the Swiss franc money market and intends to expand banks' on-call cash deposits from around 30 billion francs currently to 80 billion francs—a measure which Barclays Capital analyst Thorsten Polleit described as "quantitative easing."
The action to stem the franc's rise comes after the currency surged to a series of fresh record highs against the euro and dollar, as concerns over global economic growth and the euro-zone debt crisis left foreign-exchange investors running to the cover of the safe-haven currency.
"It remains to be seen whether this is more effective [in the medium-term] than last year's failed but massive exercise in foreign-exchange intervention, but instinctively this should work rather better," said Marc Ostwald, a strategist at Monument Securities.
The SNB intervened to try to check the franc's gains between March 2009 and June 2010. During that time, the bank added a huge amount of euros to its reserves, whose decline in value last year resulted in a 19.2 billion francs book loss for 2010.
This time around though, it should be noted the SNB isn't physically intervening, said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London.
"In terms of the medium- to long-term effectiveness, this is the tricky part. The franc should remain well bid as long as there is continuing uncertainty regarding euro-zone sovereign bond markets and uncertainty regarding economic growth concerns within the euro zone," he said.
For now though, the bank has succeeded in weakening the franc.