August 3, 2011

Swiss Takes Surprise Action to Protect Franc, Slashing Rates

Flight to currency from global debt woes driving up value

In an attempt to safeguard the Swiss franc against skyrocketing value, the Swiss National Bank (SNB) on Wednesday said it would slash already-low interest rates in a move that shocked markets. Investors fearing debt crises in euro zone nations and in the U.S., notwithstanding Tuesday's action by Congress and the president, have increasingly turned to the Swiss franc as a safe haven in troubled times.

In a Reuters report, SNB said that it would not tolerate the tight monetary conditions brought about by what it characterized as a "massively overvalued" franc. The overvaluation, it said, threatened economic growth and also increased risks on price stability. In a statement, the bank said, "The SNB is keeping a close watch on developments on the foreign exchange market and will take further measures against the strength of the Swiss franc if necessary."

The Swiss interest rate is already extremely low at 0.25%, but the bank said it would lower it to "as close to zero as possible" and also vastly increase the supply of the currency in the money market in the next few days.

Driven by the constant worry over the euro zone debt crisis and fears of a U.S. downgrade, the franc has shot up 18% against the euro and 22% against the dollar over the past few months. It gained 12% against the euro in July alone, triggering fears of an impending Swiss recession as the currency's high value began to hit the manufacturing sector and with the KOF economic barometer indicating a slowdown.

The news helped the euro, which gained 2.5% against the franc; it had hit a new low before the increase was announced. The dollar also gained on the news, but analysts warned that such gains were most likely only temporary. Neil Mellor, currency strategist at Bank of New York Mellon, was quoted saying, "These measures will probably not bring a halt to the Swiss franc's appreciation. It will be a hard fought battle for the SNB and at most this will slow the pace of appreciation."

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