The Swiss National Bank (SNB) is pulling out “the kitchen sink” in its efforts to weaken the Swiss franc, says FxPro.com. It has said that it will “no longer tolerate” an exchange rate below SFr1.20 per euro. It will defend this floor with “the utmost determination” and will buy foreign currency in “unlimited quantities” to keep the ‘Swissie’ down. The SNB’s announcement prompted an 8.5% jump in the euro to around SFr1.20.
The franc has gained over a fifth against the euro this year as investors have sought a safe haven from the euro crisis. The jump in the franc has undermined Switzerland’s crucial export sector by making Swiss goods more expensive and fuelled fears of deflation. Inflation is down to just 0.2% year-on-year and economic forecaster BAK Basel now expects growth to reach just 0.8% next year, less than half the 1.95 it has pencilled in for 2011.
Stabilising the rate at SFr1.20 may well work, for now at least, as the SNB can print francs to sell in the foreign exchange (forex) market. But weakening the franc further will be difficult, says Ulrike Rondorf of Commerzbank. After all, the euro crisis shows no sign of abating.
Fending off hordes of risk-averse investors will be all the harder, notes FxPro.com, because it is acting alone. “Joint intervention has a much better chance of success.” Given the large sums the SNB lost in the forex market last year trying to weaken the franc, further losses would dent its credibility.
The SNB’s move, meanwhile, may prompt other central banks to weaken their currencies to boost growth – a race to the bottom that bodes well for gold.