Franc Gains as Switzerland Stops Short of Peg

Bloomberg

The Swiss franc strengthened after the country’s central bank announced additional liquidity measures while refraining from announcing tougher moves such as adopting a currency target or a temporary peg.

The Swiss National Bank will boost liquidity to the money market, expanding banks’ sight deposits to 200 billion francs ($253 billion) from 120 billion francs, it said in an e-mailed statement from Zurich today. It will also continue to repurchase outstanding SNB Bills and use foreign-exchange swap transactions. The franc surged as much as 2.1 percent against the euro, trading at 1.1332 at 10:03 a.m. in Zurich.

“Markets are relatively disappointed,” said Caesar Lack, head of economic research at UBS AG’s Wealth Management Research in Zurich. “They hoped for an intervention or a currency peg. We didn’t share that assessment, however.”

The franc reached a record high against the euro on Aug. 9, reflecting investor concern that the region’s fiscal crisis may continue to worsen. While the SNB trimmed borrowing costs to zero on Aug. 3, the currency continued to appreciate, threatening to erode exports and spark a recession. SNB Vice President Thomas Jordan has said policy makers are assessing “a whole range of options,” with a temporary currency peg to the euro among the possibilities.

“It remains to be seen what they do next,” said Fabian Heller, an economist at Credit Suisse Group AG in Zurich. “The SNB has other means of action, but for now, they’re just pursuing this liquidity strategy.”

Government Meeting

The seven-member government has also signaled concern that the franc’s ascent may hurt the economy. They currency is on the agenda at today’s weekly cabinet meeting.

The franc, considered a haven in times of turmoil, has strengthened 11 percent this year against the euro. It reached a record 1.0075 on Aug. 9, trading near parity with the single currency. Versus the dollar, the franc has appreciated 19 percent this year to an all-time high of 70.71 centimes on the same day earlier this month.

With exports contributing about half of gross domestic product, Swiss companies includingSwatch Group AG (UHR), the world’s biggest watchmaker, and chemicals maker Lonza Group AG are under increasing pressure to cut costs to maintain margins.

Goldman Sachs Group Inc. earlier this month cut its Swiss growth forecasts for this year to 1.9 percent from 2.1 percent, and for next year to 0.6 percent from 2 percent. The “chances of the real economy emerging unscathed are remote,” economists Dirk Schumacher and Adrian Paul said.

‘Very Difficult’

The SNB, led by Philipp Hildebrand, said that “it will, if necessary, take further measures against the strength of the franc,” without elaborating. Policy makers will hold their next quarterly monetary assessment on Sept. 15.

The SNB has been reluctant to purchase foreign currencies to weaken the franc after intervention attempts in the 15 months through mid-June 2010 caused a record loss of $21 billion last year and sparked calls such as from Christoph Blocher, vice president of thePeople’s Party for Hildebrand to resign.

Lawmakers, facing general elections in October, have now pledged their support to the SNB in an attempt to avert job losses and prevent companies from moving production sites abroad. Swiss Economy Minister Johann Schneider-Ammann said last week that the central bank “wants to feel that it’s being supported on significant decisions.”

Still, Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA inLondon, told Bloomberg Television in an interview today that it’s going to be near impossible for SNB policy makers to peg the franc to the euro and commit to unlimited currency interventions.

“It’s going to be very difficult for the SNB to stand in the way of the foreign-exchange markets, which will want to push the franc higher,” he said. “There were strong expectations, maybe too much, in terms of interventions or a peg. What we’re seeing here is disappointment.”

To contact the reporters on this story: Simone Meier in Zurich at smeier@bloomberg.net; Klaus Wille in Zurich at kwille@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net