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SNB Foreign-Currency Holdings Hit Record on Intervention

SNB President Thomas Jordan
SNB President Thomas Jordan said last month that policy makers are “observing a considerable upward pressure on the franc” as investors shift into havens including the Swiss currency. Photographer: Gianluca Colla/Bloomberg

The Swiss central bank’s foreign-currency reserves surged to a record in May as the euro region’s increasing turmoil forced policy makers to step up their defense of the franc floor.

Currency holdings rose to 303.8 billion Swiss francs ($318 billion) from 237.6 billion francs in April, according to a statement published on the Swiss National Bank’s website today. Walter Meier, a spokesman at the SNB in Zurich, said a “large part” of the increase was due to currency purchases to defend the minimum exchange rate of 1.20 francs per euro.

The central bank finds itself engulfed by the euro region’s worsening fiscal crisis after Spain’s banking woes and Greece’s inconclusive elections raised the specter of a break-up of the currency union. SNB President Thomas Jordan said last month that policy makers are “observing a considerable upward pressure on the franc” as investors shift into havens including the Swiss currency.

“It’s quite a significant increase,” said Alessandro Bee, an economist at Bank Sarasin in Zurich. “The euro crisis is decisive -- if there’s a further worsening, the SNB will be forced to remain active on markets.”

SNB Intervention

The franc was at 1.2012 versus the euro as of 1:02 p.m. in Zurich, little changed on the day. It has gained 1.2 percent this year, trading at an average of 1.2052. The euro dropped to a two-year low versus the dollar last month.

Investor concern about Greece’s future in the euro region mounted last month after voter support grew for parties opposed to austerity measures. A second ballot will be held on June 17. In Spain, Budget Minister Cristobal Montoro used a radio interview on June 5 to call for outside support, saying the sums needed to aid the country’s banks aren’t “astronomical.”

Geoffrey Kendrick, head of European currency strategy at Nomura International in London, wrote in an e-mailed note today that the SNB probably spent 57 billion francs in May alone to defend the floor, or 61 billion francs from April 1. The SNB doesn’t disclose details of its market operations.

“This strong increase in currency reserves in May shows that doubts about the floor’s credibility are emerging and that pressure is increasing on the SNB,” said Julien Manceaux, an economist at ING Group in Brussels. “However, for the moment, there is no reason to believe the floor could be broken even under higher pressure.”

ECB Rates

The Bank of England today left its stimulus plan on hold as the threat from above-target inflation overrode policy makers’ concerns about the risk to the U.K. from Europe’s debt crisis. Officials also kept the benchmark interest rate at 0.5 percent.

China today cut its benchmark lending and deposit rates for the first time since 2008.

The European Central Bank yesterday held its benchmark interest rate at 1 percent, with President Mario Draghi saying that “a few” council members had voted for a cut. The central bank has injected more than 1 trillion euros ($1.3 trillion) of three-year loans into the banking system and purchased government bonds to fight the turmoil.

The crisis is clouding the economic outlook, with at least eight of the 17 euro nations including Italy and Spain in recession, commonly defined as two consecutive quarters of contraction. In Germany, Europe’s largest economy, business confidence dropped more than economists forecast in May. The unemployment rate in France rose in the first quarter, Paris-based national statistics office Insee said today.

Swiss Expansion

German exports probably declined in April, according to a Bloomberg News survey. The Federal Statistics Office in Wiesbaden will release the trade report at 8 a.m. tomorrow.

In the U.S., the Labor Department may say initial jobless claims fell to 378,000 last week from 383,000 in the previous period, according to a Bloomberg survey. The Federal Reserve may report U.S. consumer borrowing rose at a slower pace in April than in March.

So far, the franc ceiling has helped shield the economy from some of the European turmoil. Swiss economic growth unexpectedly accelerated in the first quarter, led by consumer demand. The unadjusted jobless rate slipped in May, a government report showed today. At the same time, consumer prices had their eighth straight annual decline last month, partly as the franc strength made imports cheaper.

‘Drastic Moves’

SNB policy makers imposed the currency ceiling in September after the franc reached near parity with the euro in the previous month, raising the threat of deflation. Jordan said in an interview with SonntagsZeitung published on May 27 that a government-led panel is weighing measures including capital controls to weaken the franc if the turmoil escalates.

“We don’t expect further measures,” said Alexander Koch, an economist at UniCredit Group in Munich. “Drastic moves such as capital controls are certainly being discussed. But not least due to the negative impact this would have on Switzerland’s reputation as a financial center, we expect it to happen only in a Lehman-like crisis scenario.”

The currency holdings are calculated according to standards by the International Monetary Fund at the beginning of every month.

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