The Swiss National Bank shocked markets on Tuesday by setting an exchange rate cap on the soaring 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 8 percent 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," SNB Chairman Philipp Hildebrand said.
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 on Tuesday, is also seen gaining. Fears that the world economy may tipback into recession have spurred investors to dump riskier assets such as stocks and seek the relative safety of gold and the franc and yen.
"As the SNB's pockets are very deep, it should succeed in stabilising the rate above 1.20," Commerzbank economist Ulrike Rondorf said. The SNB, which holds its quarterly monetary policy review on September 15, said that even at a rate of 1.20 to the euro, the franc was still high and should continue to weaken over time. "If the economic outlook and deflationary risks so require, the SNB will take further measures," it said.