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Thursday, August 11, 2011

Swiss franc has gained 31 percent versus the euro - Policy Options and unintended circumstances

Swiss Franc Falls as SNB Sees Possible Euro Peg



The franc weakened after Swiss central bank Vice President Thomas Jordan said a temporary peg of the franc is part of the bank’s toolbox, as policy makers struggle to stem a record-breaking rally.

“Any temporary measures to influence the exchange rate are permissible under our mandate as long as these are consistent with long-term price stability,” Jordan said in an interview with Tages-Anzeiger newspaper published today, when asked about a temporary peg of the franc. Swiss National Bank spokesman Walter Meier confirmed the remarks.

The comments highlight the scale of the crisis engulfing the Swiss economy as policy makers seek measures to fight off investors piling into the franc, a haven in times of crisis. While President Philipp Hildebrand has signaled the central bank is unwilling to give up its sovereignty, some economists have said the franc’s surge toward euro parity is adding pressure on the SNB to consider a peg for the first time since the Bretton Woods currency system was abandoned in 1973.

Normally, we would have argued this could never happen,” said Ursina Kubli, an economist at Bank Sarasin in Zurich. “It would be a very drastic measure but now it’s becoming more and more realistic.”

Surprise Cut

The franc traded at 1.0515 versus the euro at 10:54 a.m. in Zurich after rising as high as 1.0257 earlier today. It reached a record 1.0075 on Aug. 9. Against the dollar, the currency traded at 73.81 centimes, down 1.6 percent.

The franc has gained 31 percent versus the euro over the past year, reflecting investor concern that the euro region’s fiscal crisis may continue to worsen. While the SNB boosted liquidity on the money market and earlier this month unexpectedly trimmed borrowing costs to zero, the currency continued to appreciate, choking economic growth and exports.

Jordan didn’t say whether the SNB currently considers a currency peg. Hildebrand said earlier this month that “a fixed and permanent peg of the franc to the euro isn’t compatible with our constitutional and legal mandate to conduct an independent monetary and exchange rate policy.”

Independent Policy

“It’s certainly not the easiest measure to introduce neither in political nor legal terms,” SNB Governing Board member Jean-Pierre Danthine told Le Temps newspaper in an interview published today. The SNB’s mandate is “to conduct an independent monetary policy.”

With exports accounting for about half of gross domestic product, the Swiss economy is vulnerable to an appreciating franc. Nestle SA (NESN), the world’s largest food company based in Vevey, Switzerland, said yesterday the franc’s strength stripped 14 percentage points off its first-half sales growth.
Bank Sarasin’s Kubli said the franc’s surge could prompt companies to shift production sites abroad to help protect earnings and avoid “repeated exchange-rate shocks.”

“For a lot of exporters, it becomes impossible to remain competitive,” she said. “People know that if there are any turbulences, the franc appreciates as a result. That could be enough of a reason for companies to leave.”

The SNB said on Aug. 3 that policy makers are “keeping a close watch” on currency developments. The franc’s surge “has accelerated sharply” over past weeks and the “outlook for the Swiss economy has deteriorated substantially,” it said.

‘Right Time’

The central bank boosted the supply of liquidity to the money market yesterday, expanding banks’ sight deposits to 120 billion francs ($163 billion) from 80 billion francs.

“We are able to increase liquidity even further,” Jordan said. “We are also considering a range of other monetary-policy measures and we’ll act as soon as we’re convinced that it’s the right time,” he said without elaborating.

George Magnus, senior economic adviser to UBS AG in London, said he “can’t see any merit” in a franc peg. “Any form of pegging structure actually gives them obligations to intervene and perhaps even on a daily basis and I’m not sure that’s something they would want,” he said. “It doesn’t mean that the franc won’t be subject to speculative pressure, which would still oblige them to intervene.”

Jordan also said he considers the franc “massively overvalued” against both the dollar and the euro. The central bank ended attempts to weaken the franc through purchases of foreign currencies in mid-June 2010.

The measure sparked a record loss of $21 billion last year.

The SNB will hold its next quarterly meeting on Sept. 15.

To contact the reporters on this story: Klaus Wille in Zurich at kwille@bloomberg.net; Paul Verschuur in Zurich at pverschuur@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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