Swiss Franc Tumbles Against Euro as National Bank Defends Currency

‘Line in the sand’ will be ‘very expensive strategy’

The Swiss National Bank on Tuesday stepped in to impose a ceiling on the exchange rate of the national currency, causing the franc to halt four straight days of gains and fall the most ever against the euro.

The action set the franc plunging as much as 8.7% and bringing it to its weakest level since July. Bloomberg reported that the central bank said it would defend the target with the “utmost determination.”

Peter Rosenstreich, chief currency analyst at Swissquote Bank SA in Geneva, said in the report, “The SNB has set a line in the sand. This type of peg was not expected. We’ll continue to see demand for the franc, especially against the euro, given the rise in risks from both Europe and the global slowdown. How they defend this will be a very expensive strategy.”

In a statement, the bank said it was “aiming for a substantial and sustained weakening of the franc. With immediate effect, it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs” and “is prepared to buy foreign currency in unlimited quantities.” The franc has been rising, as previously reported by AdvisorOne, to the point that Switzerland has become prohibitively expensive for its own citizens and businesses are considering moving elsewhere.

Geoffrey Yu, a foreign exchange strategist at UBS AG in London, was quoted in the report saying, “In announcing a floor, the SNB has tacitly acknowledged that its money-market options have largely been exhausted. The risks for this strategy are great and the SNB will need to carefully calibrate its money-market operations.”

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