June 25 (Bloomberg) -- The Swiss National Bank is attempting to put a “line in the sand” with its first intervention in the foreign-exchange market in more than a decade after previous attempts to weaken the franc failed.

Currency traders said the Zurich-based central bank intervened twice yesterday, driving the franc down against more than 150 currencies tracked by Bloomberg. It fell the most in three months versus the dollar and euro. The franc extended declines today.

“They’re trying to put a line in the sand at 1.50” to the euro, said Ashraf Laidi, chief market strategist in London at CMC Markets. “There’s a big debate as to whether they will continue doing this, and for how long they will remain successful.”

Swiss consumer prices fell the most in five decades in May, dropping 1 percent from a year earlier and adding to concern a deflationary spiral will hinder investment and slow the pace of recovery. The government predicted on June 17 that the economy will contract 2.7 percent this year, the most since at least 1975. Switzerland is vulnerable to gains in the franc because exports equal about half its gross domestic product.

“Central banks react with shock and horror to deflation,” said Steven Englander, chief currency strategist for the Americas at Barclays Capital in New York, who predicts the currency will fall to 1.60 against the euro in 12 months. “The real test is going to be as euro-swiss drifts off again, say comes down to 1.51 or even 1.5150.”

The franc slid 0.3 percent to 1.5346 per euro as of 12:14 p.m. in Zurich. It fell 0.3 percent to 1.1009 per dollar.

‘Fear Deflation’

Nicolas Haymoz, a bank spokesman, declined to comment on whether the bank acted in foreign-exchange markets today and yesterday. Chairman Jean-Pierre Roth, 63, said on June 18 that the nation’s central bankers “fear deflation” and “if we want to fight against deflation we have to stop a further appreciation of the franc.”

Governments intervene in foreign-exchange markets when they buy or sell currencies to influence rates.

While policy makers mainly sought to weaken the franc versus the euro, the latest round of intervention may have included the dollar, said Marc Chandler, the global head of currency strategy at Brown Brothers Harriman & Co. in New York, describing the moves as a new “aggressiveness’ on the part of policy makers. “It looks like the SNB changed its tactics,” he said.

The franc dropped as much as 2.4 percent to 1.5380 versus the euro yesterday and 3.2 percent against the dollar to 1.1023, the biggest declines since the central bank said on March 12 it would halt the currency’s appreciation to avoid a “dramatic deterioration” in the economy.

Caught by Surprise

The intervention surprised traders, who tested the central bank’s resolve by pushing up the franc on speculation policy makers wouldn’t try to influence exchange rates unless it strengthened beyond 1.50 per euro, said Brian Kim, a currency strategist in Stamford, Connecticut, at UBS AG. The franc will trade at 1.52 to the euro in three months, he said.

Most of the Swiss currency’s declines yesterday occurred in two periods of less than an hour each.

The first was between 6:40 a.m. and 7:30 a.m. in New York when the franc slumped 2.2 percent versus the dollar and 1.8 percent against the euro. The second lasted about 30 minutes starting at noon, with the franc falling 1.7 percent against the greenback and 1.2 percent compared with the euro.

‘Smack You’

“The central bank would theoretically always win if all they have to do is sell their own currency,” said Samarjit Shankar, a director of global strategy at Bank of New York Mellon Corp. in Boston, which administers more than $20 trillion. “If you don’t know where they’re going to come in, you can just keep trying and they’ll come in and smack you.”

The franc plunged 3.3 percent to 1.5299 against the euro on March 12, the most since the single European currency was introduced in 1999, after the central bank lowered its main lending rate to 0.25 percent from 0.5 percent and said it would buy currencies in its first solo intervention in foreign- exchange markets since 1992.

Before yesterday, the biggest declines since March 12 were on June 18 and May 15. Both times, it approached 1.50 per euro. Until this year, the central bank hadn’t intervened in foreign- exchange markets to influence prices since the mid-1990s.

The last time a central bank from one of the Group of 10 industrialized nations acted to weaken a currency was when the Bank of Japan sold 35.2 trillion yen ($366 billion) in 2003 and 2004. Instead of falling, the yen rose about 6 percent against the dollar in the year after sales ended.

Global Recession

Investors were lured to the franc last year as the global economy went into its first recession since World War II, fanning demand for currencies of nations with trade surpluses that are less reliant on international borrowing. Switzerland’s trade surplus was 8 percent of gross domestic product last year.

The franc gained 11 percent against the euro to 1.4930 in 2008, and 6.1 percent versus the dollar to 1.0602. Before yesterday, it was down 0.6 percent against euro this year and up 0.2 versus the dollar.

Switzerland’s central bank “must retain its credibility,” said Ursina Kubli, an economist at Bank Sarasin in Zurich. “I have no doubts that they have the willpower, determination and independence to push this through.”

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Klaus Wille in Zurich at kwille@bloomberg.net.

Last Updated: June 25, 2009 06:25 EDT