SNB Steps Up Franc Fight to Counter ‘Massive Overvaluation’

SNB Steps Up Franc Fight to Counter ‘Massive Overvaluation’
The franc has been pushed to records against the euro and the dollar, reflecting investor concern about the euro region’s worsening fiscal crisis and Standard & Poor’s decision to strip the U.S. of its AAA credit rating for the first time. Photographer: Chris Ratcliffe/Bloomberg

The Swiss central bank stepped up its fight to counter what it called a “massive overvaluation” of the currency by boosting liquidity. The franc dropped.

The Swiss National Bank will “significantly increase” the supply of liquidity to the money market and expand banks’ sight deposits to 120 billion francs ($165 billion) from 80 billion francs. It will also conduct foreign-exchange swap transactions to create liquidity, a measure last used in 2008, it said in an e-mailed statement from Zurich today.

The franc has been pushed to records against the euro and the dollar, reflecting investor concern that the euro region’s fiscal crisis may continue to worsen and the Standard & Poor decision to strip the U.S. of its AAA credit rating. While the SNB trimmed borrowing costs to zero on Aug. 3 and almost tripled sight deposits to 80 billion francs, the currency continued to appreciate, choking economic growth and exports.

“There is a chance that they will be successful in stabilizing the franc at its current level,” said Marcus Hettinger, a foreign-exchange strategist at Credit Suisse Group AG in Zurich. If they don’t, they may “resort to further measures like interventions.”

The franc traded at 1.03241 versus the euro at 5:12 p.m. in Zurich. It reached a record 1.0075 yesterday, bringing its gain this year to 20 percent. Against the dollar, the currency was at 72.82 centimes, down from an all-time high of 70.71 centimes yesterday.

‘Massive Overvaluation’

SNB Vice President Thomas Jordan said in an interview with Weltwoche magazine published today that policy makers are assessing “a whole range of measures” to counter further franc gains if needed. He declined to elaborate.

The franc dropped against all of its 16 major peers tracked by Bloomberg after today’s decision. It has jumped 23 percent year-to-date against a basket of nine developed-market currencies, according to the Bloomberg Correlation-Weighted Currency Indexes.

With exports accounting for about half of gross domestic product, the Swiss economy is vulnerable to an appreciating franc. Nestle SA, the world’s largest food company based in Vevey, Switzerland, said today the franc’s strength stripped 14 percentage points off its first-half sales growth.

‘Safe-Haven Trades’

Peter Rosenstreich, Geneva-based chief currency analyst at Swissquote Bank SA, said today’s decision is “probably not going to be enough” to stop the franc from appreciating.

“At some point we are going to see an intervention by the SNB, just because they can’t handle this rate of appreciation,” he said. “I’m not sure that even if they intervene, the will for safe-haven trades dissipates.”

While the franc’s ascent is making exports less competitive, it’s also increasing deflation risks as the economy cools. Consumer prices rose 0.5 percent in July from a year earlier after increasing an annual 0.6 percent in June.

“The massive overvaluation of the franc poses a threat to the development of the economy in Switzerland and has further increased the downside risks to price stability,” the SNB said. “The SNB is keeping a close watch on developments on the foreign-exchange market and on financial markets. If necessary, it will take further measures against the strength of the franc.”

The SNB will hold its next quarterly rate assessment on Sept. 15 in Zurich.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE