Swiss central bank abandons franc versus euro ceiling

PanARMENIAN.Net - Switzerland's central bank said Thursday, Jan 15, it has scrapped a policy that limited how much the euro could fall against the Swiss franc, an unexpected decision that caused gyrations in financial markets.

The move to ditch the policy — which ensured the euro did not fall below 1.20 francs — sent the euro plummeting a stunning 30 percent against the Swiss currency before it recovered somewhat. By later morning, it was down 13 percent at 1.04 francs.

The Swiss stock index dropped 9 percent as investors worried about the prospect of the country's exports becoming more expensive and less competitive internationally.

The Swiss central bank introduced the minimum exchange rate policy in Sept. 2011 in an attempt to halt the rise of the franc — a traditional safe-haven currency for investors — against the euro at a time when the eurozone debt crisis was at its height. The strong franc was particularly problematic for Swiss exporters, who were forced to drastically cut their prices to remain competitive.

"This exceptional and temporary measure protected the Swiss economy from serious harm," the Swiss National Bank said in a statement.

However, the central bank said it has now "concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified."

Because of the policy, the Swiss franc was essentially pegged to the euro, which has been sliding in foreign exchange markets in recent months, particularly against the dollar. By extension, the Swiss franc's value against the dollar has fallen significantly in that period, as well.

The Swiss National Bank, or SNB, noted that because of this, the franc's "overvaluation has decreased as a whole" since the minimum exchange rate was introduced.

To keep the franc from surging in value once again, the national bank said it would also lower its average interest rate to minus 0.75 percent from minus 0.25 percent. Lower rates can help an economy and also weaken the national currency.

Analysts say that may not be enough to keep the franc from surging to uncomfortably high levels once again.

"The SNB's decision to abandon its exchange rate ceiling is surprising and we suspect that the bank will soon need to intervene against the currency to prevent a further rapid appreciation against the euro," said Jennifer McKeown, economist at Capital Economics in London.

She added that an appreciation in the franc against the euro could hit the Swiss economy particularly hard as the country sends nearly half of its exports to the eurozone.