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Franc Plunges Most Ever Versus Euro as Central Bank Draws Line

Franc Plunges Most Ever Versus Euro, SNB Acts to Limit Gain
Switzerland’s currency snapped four days of gains versus the euro, falling as much as 8.7 percent and declining to the weakest level since July. Photographer: Gianluca Colla/Bloomberg

The franc tumbled, dropping the most ever against the euro, after the Swiss central bank imposed a ceiling on the currency’s exchange rate and said it will defend the target with the “utmost determination.”

The yen retreated against its most-traded counterparts after Japan’s Finance Minister Jun Azumi said he will lobby Group of Seven officials that a strong yen is bad for the global economy. The euro fell for the sixth day against the dollar, the longest losing streak since April 2010. The Norwegian krone surged as investors sought an alternative to the franc.

“They have taken out one of the key safe-haven currencies,” said Simon Derrick, chief currency strategist at Bank of New York Mellon in London, in an interview on Bloomberg Television’s “Midday Surveillance”. “Yes it’s not a peg, yes they’re setting a floor on this, but as soon as people get a good sense of how far the SNB can drive it then they’re going to start very quickly to fight against them.”

The franc dropped 8.8 percent versus the euro to 1.20697 at 5 p.m. in New York, after earlier depreciating 9.9 percent to 1.21911, the lowest level since July 5. It weakened 9.5 percent to 86.21 centimes per dollar.

Switzerland’s currency fell at least 8.2 percent against all 16 of the most-active currencies. The euro fell 0.7 percent to $1.3998, touching the least since July 13. The dollar rose 1 percent to 77.66 yen.

Swiss National Bank

The franc had surged to records against the euro and the dollar, hurting exports and eroding economic growth. While the Swiss National Bank last month boosted liquidity to the money market and lowered borrowing costs to zero, investor concern that governments may struggle to contain Europe’s worsening debt crisis has continued to push the currency higher.

The SNB is “aiming for a substantial and sustained weakening of the franc,” the Zurich-based central bank said in an e-mailed statement. “With immediate effect, it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs” and “is prepared to buy foreign currency in unlimited quantities.”

The franc is the best performer this year among a basket of the currencies of 10 developed markets, appreciating 4.6 percent, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar was the worst performing currency, losing 4.4 percent.

Swiss National Bank President Philipp Hildebrand cut interest rates to “as close to zero as possible” on Aug. 3, and subsequently boosted banks’ sight deposits, or cash that can be withdrawn on demand, to 200 billion francs ($255 billion) from 30 billion francs.

Franc Efforts

Hildebrand’s past efforts to stem the franc’s advance, including 15 months of currency sales that contributed to the SNB’s record $21 billion loss last year, couldn’t stop it from outperforming 16 major peers since Europe’s debt crisis began in late 2009. Investors see Switzerland as a refuge because it has a lower ratio of debt to gross domestic product than the euro area and expects budget surpluses through 2013.

Swiss consumer prices rose at the weakest pace in almost a year in August as a surging franc lowered the cost of imported goods, a report today showed.

“In circumstances of a continued crisis in the euro-zone, we believe that the SNB may be required to purchase foreign currency of between $500 billion and $1 trillion,” Derek Halpenny, European head of currency research at Bank of Tokyo-Misubishi UFJ Ltd. in London, wrote to clients.

Andrew Busch, a global currency strategist at Bank of Montreal in Chicago, estimated the central bank may absorb 200 billion euros in two months to defend the peg, in a conference call to clients.

Krone Demand

Norway’s krone rose against all its 16 most-traded counterparts as investors sought an alternative European currency to the euro and franc.

“The Norwegian krone has been very strong today against most currencies, which suggests that euro-krone becomes a substitute or proxy for euro-Swiss,” said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London.

The krone rose 0.6 percent to 5.4091 per dollar and advanced 1.4 percent to 7.5714 versus the euro. The currency surged 9.4 percent to 6.2683 against the franc.

The Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, rose 1.1 percent to 75.94, the highest level since July 13.

Euro-Zone Uncertainty

The euro fell below its 200-day average of $1.4016 for the first time since July 12.

“Switzerland’s success is very much contingent on how we see things play out in the euro zone,” said Jeavon Lolay, head of global research for Lloyds Banking Group in London. “It’s a big call for them to do this while there is still so much uncertainty around.”

The European Central Bank meets Sept. 8. European economic data is underperforming by the most since March 2009, according to Citigroup’s Eurozone Economic Surprise Index.

The yen fell for a second day against the dollar after reaching a record high since World War II of 75.95 on Aug. 19.

“We’re very concerned about excessive yen gains and I want to clearly state that we are watching speculative movements with great interest” at the Sept. 9-10 gathering, Minister Azumi told reporters in Tokyo today. ”I’m eager to convince them to share the same view.”

G-7 finance ministers and central bank chiefs are scheduled to meet Sept. 9 in Marseille, France.

Japanese policy makers are “unlikely” to follow Switzerland’s lead in setting a ceiling for their currency to stem appreciation, according to a former chief foreign-exchange dealer of the nation’s central bank. Japanese authorities sold 4.51 trillion yen ($58 billion) last month, the most in foreign-exchange intervention for any month since 2004.

“I don’t want to say it’s impossible, but it’s quite unlikely for Japan” to follow the Swiss lead, said Masaaki Kanno, who is now chief Japan economist at JPMorgan Chase & Co. in Tokyo. “The big difference between Switzerland and Japan is size of economy.”

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