Swiss may buy euros to stem franc's rising value
THE Swiss central bank may need to ready its "nuclear weapon" of buying euros as the franc heads for the biggest weekly advance on record against Europe's single currency.
While the Swiss National Bank (SNB) has so far avoided currency purchases in its latest bid to keep a lid on the franc, it may soon have no alternative but to follow through on its threat to intervene, economists and strategists said.
"The SNB will fire its nuclear weapon and start interventions if the franc reaches parity," said You-Na Park, a strategist at Commerzbank in Frankfurt. "The current franc levels really hurt the economy."
The SNB, led by Philipp Hildebrand, is under pressure from executives including Swatch Group CEO Nick Hayek and lawmakers such as Swiss People's Party vice-president Christoph Blocher to weaken the franc to keep companies from cutting jobs and moving production sites abroad.
The currency's 16pc ascent against the euro in the past year is hurting exports and raising the risk of an economic recession.
While the franc has weakened against the euro since August 3, when the SNB cut borrowing costs to zero and boosted liquidity to the money market in order to fight the currency's appreciation, it has reversed losses over the past three days.
The franc, considered a haven in times of global turmoil, has gained 6.9pc against the euro since August 30, putting it on track for the biggest weekly gain since the introduction of the single currency in 1999. It was at 1.1056 in Zurich yesterday, up 2.5pc on the day.
"Pressure on the franc remains as long as the euro area's fiscal problems drag on," said Cornelia Luchsinger, an economist at Zuercher Kantonalbank in Zurich.
Switzerland's currency is 39pc over-valued against the euro, based on purchasing power parity as calculated by the OECD. (Bloomberg)