SWITZERLAND’S central bank shocked currency markets yesterday by pegging its burgeoning currency to the euro to limit its soaring value as a safe haven and shore up battered Swiss exporters.
The Swiss National Bank said it was “prepared to buy foreign currency in unlimited quantities” to keep the franc at a minimum 1.20 exchange rate against the euro.
The news sent the franc sharply down almost nine per cent against the euro, causing shock among watching analysts, and reigniting fears of “currency war” style reprisals by other central banks to weaken their currencies.
But experts warned that such intervention was unlikely to prove effective for long because the underlying problems causing flight from risk were still in place.
The SNB issued a brutal statement making it clear it would stop at nothing to achieve its goal.
“The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development,” it said.
“The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.”
Jeremy Cook, chief economist at currency exchanger World First, said its use of “unlimited” was virtually unprecedented. “People are going to try to test the SNB’s resolve in protecting this level,” he said.
The move was also a challenge to European authorities to put an end to the Eurozone crisis causing the rush to the franc. The European Central Bank acknowledged the decision but gave no comment on it.
Cook said the SNB’s move was “an opening battle” but could bring short term relief to Swiss exporters until a solution to the Eurozone problems could be found.