Swiss franc drops 8pc as exchange rate cap imposed
THE Swiss National Bank (SNB) shocked markets yesterday by setting an exchange rate cap on the soaring Swiss franc to stave off a recession, discouraging investors anxious about flagging global growth from using the currency as a safe haven.
Using some of the strongest language from a central bank in the modern era, the SNB said it would no longer tolerate an exchange rate below 1.20 francs to the euro and would defend the target by buying other currencies in unlimited quantities.
The move immediately knocked about 8pc off the value of the franc, which had soared by a third since the collapse of Lehman Brothers in 2008 as investors used it as a safe haven from the eurozone's debt crisis and stock market turmoil.
Analysts said the SNB should be able to defend 1.20 as it can print unlimited francs but that long-term success depended on efforts to deal with the eurozone's debt problems given the relative strength of the Swiss economy and government finances.
"The current situation therefore acutely threatens our economy and our labour market. It carries the risk of a recession as well as deflationary developments," said the central bank's chairman Philipp Hildebrand
"The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities."
The move was seen as a new shot in the currency wars, with Japan expected to try to weaken the yen if the Swiss action diverts more safe-haven inflows into the currency.
Gold, which hit a record higher earlier yesterday, is also seen gaining.
Fears that the world economy may tip back into recession have spurred investors to dump riskier assets such as stocks and seek the relative safety of gold and the franc and yen.