Swiss set floor for franc exhange

THE Swiss franc plunged against the euro and dollar yesterday, after Switzerland’s central bank shocked markets by setting a floor for the euro/Swiss exchange rate in an effort to curb franc strength which has taken a toll on the economy.

The euro rocketed on EBS after the Swiss National Bank set a rate target of 1.20 francs to the euro and said it would enforce it by buying foreign currency in unlimited quantities.

However, analysts questioned whether the move could succeed given the robust demand for safe-haven assets that drove the franc to record highs last month.

Within minutes of the announcement, the euro leapt to 1.22 francs on EBS.

Some analysts were sceptical the bank would be able to fight franc strength for long, as it faces huge losses on its balance sheet if it keeps the proceeds of franc selling in euro.

“The implementation of a peg and its ongoing enforcement will open up the central bank to potentially unlimited purchases of the euro if the euro/Swiss franc rate should fall below 1.20,” said Eric Theoret, a strategist at Scotia Capital.

The bank cut its already low interest rate target to nil on August 3. It also flooded the banking system with francs, effectively driving money markets and forward rates deep into negative territory and making holding Swiss francs a costly proposition for investors.

The Swiss franc has dropped roughly 20% versus the euro in the past month.