LONDON: The Swiss National Bank has emerged as a significant buyer of the euro as it seeks to contain the franc's strength, but given how fast the common currency is falling, many question how long such purchases will last.
The SNB's appetite for euros puts it at odds with other global central banks which have been lowering the share of the currency in their foreign exchange reserves in recent months.
In fact, the euro's share of global central banks' reserves fell to its lowest in over a decade in the third quarter of 2014, according to International Monetary Fund data.
Switzerland's FX reserves hit a record high last month as the SNB intervened after a two-year absence, buying an estimated 20 billion euros in December to defend a three-year old cap of 1.20 francs per euro.
"A lot depends on how much they are accumulating and the speed at which they are buying euros," said Jonathan Webb, head of FX strategy at Jefferies.
"While in the short run they will tend to keep a bulk of their reserves in euros just to ensure that it doesn't weaken further, over a period of time I would expect them to sell euros and lower the share."
Many reserve managers have shunned the euro since the European Central Bank introduced negative interest rates last June, making it costly to hold. The euro has lost over 13 percent in the past six months to hit a 9-year low of $1.1754 last week.
While central banks from Russia to Nigeria have had to draw down on reserves in recent months to stem capital flight and prevent steep local currency losses, Swiss reserves have ballooned.
Foreign exchange reserves held by various central banks have fallen from record highs ever since the dollar's rise accelerated in July on expectations that the Federal Reserve could start raising interest rates in 2015.
STERLING, CANADIAN DOLLARS MAY BENEFIT
The SNB holds nearly 45 percent of its reserves in euros, down steadily from 57 percent in 2011. It holds about 30 percent in the dollar, 7 percent in sterling, 9 percent in the yen and 4 percent in the Canadian dollar.
Michael Sneyd, currency analyst at BNP Paribas in London said currencies like the British pound and the Canadian dollar, along with less liquid currencies like the Korean won or the Singapore dollar, are likely to benefit if the SNB diversifies a higher proportion of its euro reserves.
The SNB held 495.104 billion Swiss francs ($490 billion) in foreign currency at the end of December, compared with 462.669 billion francs in November. The rise in December was the sharpest since the height of the euro crisis in mid-2012.
The growth in reserves reflect the SNB's intervention last month, when a rapidly weakening Russian rouble pushed the safe-haven franc up. The SNB also said in December it would start charging banks for franc deposits, hoping to stem inflows.
But with the franc climbing against the euro towards the cap, the SNB continues to intervene and is expected to do more. Expectations of further action will increase if the ECB launches a full-fledged government bond-buying programme later this month, potentially driving the euro lower.
Marc Chandler, head of currency strategy at Brown Brothers Harriman, says the SNB is possibly the only large euro buyer while other long-term investors are cutting exposure.
"The depreciating currency and low rates may be encouraging official asset managers and private investors to reduce euro exposure," he said.
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