Swiss Franc Weakens as SNB Sees Possible Peg to Euro

Swiss Franc Weakens as SNB Sees Possible Peg to Euro
A teller handles Swiss franc coins at a till in this arranged photograph in Zurich. Photographer: Gianluca Colla/Bloomberg

The franc weakened after Swiss Central Bank Vice President Thomas Jordan said a temporary franc peg is within the range of options that policy makers could use to stem the currency’s 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 today, when asked about a general currency peg. Swiss National Bank spokesman Walter Meier confirmed the remarks. The franc weakened as much as 2.5 percent.

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.

“Relief on the franc is not expected by these comments,” said Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt. “The market will probably only react to actions.”

Surprise Cut

The franc traded at 1.0517 versus the euro at 12:53 p.m. in Zurich after rising as high as 1.0257 earlier today. It reached a record 1.0075 against the euro on Aug. 9. The currency was at 74.10 centimes versus the dollar.

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.

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

Jordan didn’t say whether the SNB is currently considering a currency peg. Hildebrand, 48, 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, 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.”

‘Close Watch’

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.

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.

Jordan joined the SNB in 1997 after a three-year post-doctoral research position at Harvard University, Massachusetts, U.S. In 2007, he joined the SNB board in 2007 and was appointed vice chairman in 2010.

Coordinated Effort

George Magnus, senior economic adviser at 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.

Japan last week followed Switzerland in seeking to stem appreciating exchange rates, selling the yen and pledging to inject liquidity. The central bank acted alone in the market.

David Kohl, deputy chief economist at Julius Baer Group in Frankfurt, said Hildebrand could try and convince global counterparts to support a coordinated currency intervention.

“Hildebrand is very well connected,” he said. “It’s very difficult to intervene unilaterally. But if they managed to get other central banks on board, it would surprise markets and have a much bigger impact.”

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

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