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Last updated: September 9, 2011 8:13 pm
The Swiss franc tumbled this week after the Swiss National Bank stunned investors by setting a ceiling for its currency against the euro.
The SNB moved on Tuesday to prevent the strength of the franc from pushing Switzerland into recession by announcing that it would stop the franc from strengthening above SFr1.20 against the euro.
The action marked a change of strategy from the SNB, which had been trying to rein in the franc by flooding the money market with liquidity and using currency swaps to drive interest rates lower.
The SNB said the “massive overvaluation” of the franc, which has been driven to record levels as investors have sought a haven from the eurozone debt crisis, posed an acute threat to the Swiss economy. The central bank added that it would pursue its move “with the utmost determination” and was prepared to buy foreign currencies in “unlimited quantities”.
Paul Mackel at HSBC said the move was sudden and aggressive. “However, it needs to be aggressive to turn the tide for the Swiss franc and to take the shine off its safe haven status,” he said. “So, this is an endurance contest whereby the SNB needs to fight hard against a market that could soon test its resolve.”
The Swiss franc plunged 7.5 per cent to SFr1.2120 against the euro over the week and dropped 10.9 per cent to SFr0.8830 against the dollar.
Meanwhile, the euro came under pressure after the European Central Bank abandoned its hawkish stance on interest rates.
The euro suffered on Thursday after Jean-Claude Trichet, ECB president, warned that downside risks to the eurozone economy had intensified, adding that eurozone inflation should fall below 2 per cent in 2012 and price risks were “broadly balanced”. That marked a change from last month when he said there were “upside risks to price stability”.
Analysts said this indicated that the ECB, which raised interest rates in April and July, had now moved to a neutral monetary policy stance in the face of heightened concerns over eurozone growth and increasing worries over the eurozone debt crisis.
Over the week, the euro dropped 3.4 per cent to a six-month low of $1.3725 against the dollar, dropped 1.9 per cent to a three-month trough of £0.8629 against the pound and was down 2.2 per cent at Y106.68 against the yen.
Elsewhere the dollar strengthened, rising 1.6 per cent to a two-month peak of $1.5902 against the pound over the week, climbing 1.2 per cent to Y77.70 against the yen and gaining 1.7 per cent to $1.0463 against the Australian dollar.
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