August 17, 2011

Swiss Franc Continues Rise

Half-measures by central bank fail to rein in currency

The Swiss franc continued its rise into the stratosphere on Wednesday, spurred on by a failure by the Swiss National Bank (SNB) to directly intervene in the currency's valuation. Instead SNB boosted liquidity and said it would take additional steps.

Markets, however, according to a Bloomberg report, were expecting much more decisive action, and the franc added as much as an additional 2.1% in morning trading. As reported Tuesday by AdvisorOne, SNB had broached the possibility of pegging the currency to the euro as a means of stopping its dangerous escalation in value.

Steven Saywell, head of foreign exchange strategy for Europe at BNP Paribas SA in London, was quoted saying, “There were strong expectations, maybe too much, in terms of interventions or a peg. What we’re seeing here is disappointment ... it’s going to be very difficult for the SNB to stand in the way of the foreign exchange markets, which will want to push the franc higher.”

Lena Komileva of Brown Brothers Harriman was quoted in a Reuters report saying, "The market was expecting far more radical measures ... like targeting a specific exchange rate. This is more of the same, and is inadequate in an environment where investors are seeking safe havens." Investors have driven the currency ever upward in their quest for a safe haven from European debt woes.

Although so far SNB has dropped its interest rate to near zero and released a flood of francs onto the market, those measures have not dimmed investors’ eagerness for the currency. The Swiss economy has seen prices rise to the point that its manufacturers are considering moving jobs out of the country in an effort to keep costs under control. A cabinet meeting planned for later in the day Wednesday is expected to yield some results, with the possibility of a substantial aid package to assist small and medium-sized businesses and the tourism and hospitality sectors, all of which are suffering.

Another possibility that has been mentioned is negative interest rates—banks charging customers to keep their funds on deposit—something the country has not done since the 1970s.

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