Swiss franc plunges on intervention
The Associated Press
Thursday, March 12, 2009
LONDON: The Swiss franc slumped by a record amount against the euro Thursday after the country's central bank confirmed it was intervening to stem the currency's sharp appreciation due to its status as a safe haven.
In its statement accompanying its latest interest rate reduction, the Swiss National Bank said it would "increase liquidity substantially by engaging in additional repo operations, buying Swiss franc bonds issued by private sector borrowers and purchasing foreign currency on the foreign exchange markets."
Following the announcement and its apparent actual intervention in the markets, the euro shot up over 3 percent from 1.4880 Swiss francs to a high of 1.53.
During the financial crisis over the last three months the Swiss franc has been in demand as investors looked to put their money into what is widely considered to be a safe haven asset.
Simon Derrick, currency strategist at Bank of New York Mellon, said the Swiss National Bank was clearly concerned that its recent hefty interest rate reductions were not keeping the franc from rising. A stronger franc makes life more difficult for the country's hard-pressed exporters.
In its statement alongside the quarter point rate cut, which took the three-month Libor target rate to 0.25 percent, the Swiss National Bank predicted that the country was on course to experience deflation of 0.5 percent in 2009 as a result of the hefty fall in imported goods and services and goods.
It also warned that economic output would fall between 2.5 percent and 3 percent in 2009, with nearly all sectors of the Swiss economy hit hard by the global economic slowdown. Export industries will be particularly affected, it said.
Bank of New York's Mellon said the repercussions of the Swiss National Bank's move in the currency markets were widespread with gold surging and the yen falling.
Gold has risen from $908 an ounce before the announcement to a high of $930 as investors looked for the other major asset considered to be a safe haven.
Meanwhile, the yen has fallen against the dollar as the market speculated that the Bank of Japan, itself concerned by the export-sapping appreciation of the Japanese currency, may be next to intervene in the currency markets.
Derrick said there's a real danger now that "beggar thy neighbor" policies could be enacted around the world as countries look to gain an advantage relative to others by reducing the value of their currencies.
It is widely considered that one of the reasons why the 1930s depression lasted so long was that countries acted independently to protect their own interest by undermining their currencies and that as a result it may come up in discussions, at least on a bilateral level, at this weekend's G-20 meeting of finance ministers and central bankers in southern England.
"I have to suspect that given that this has happened, it will be on the agenda at least away from the main forum as the last thing anyone wants is beggar-thy-neighbor policies," said Derrick.
Christine Lagarde, France's finance minister, has been vocal in her concerns about how Britain is gaining an advantage by doing nothing to stem the sharp fall in the pound against the euro, and has argued that the monetary authorities have been pursued a policy of benign neglect in the hope that it will give Britain an edge in export markets when they recover.