Date
17 December 2017
Switzerland has rattled the global financial markets by suddenly abandoning a cap on the franc-euro exchange rate. Photo: Bloomberg
Switzerland has rattled the global financial markets by suddenly abandoning a cap on the franc-euro exchange rate. Photo: Bloomberg

Swiss stun markets by removing cap on franc

Switzerland’s central bank stunned markets Thursday as it abandoned a currency exchange rate ceiling put in place more than three years ago, sending the franc soaring against the euro.

The Swiss National Bank (SNB) said it was removing a cap of 1.2 Swiss francs to the euro, allowing its currency to trade freely against the European common unit.

The scrapping of the ceiling, which had been introduced during the eurozone crisis in 2011 when investors piled into the perceived haven of Swiss assets, triggered mayhem on foreign exchange trading desks.

As investors who had been betting on a continuation of the ceiling scrambled to close positions, the Swiss franc surged as much as 39 per cent against both the euro and the dollar, Financial Times reported. 

The Swiss central bank’s decision was not taken as part of a coordinated policy with other central banks, the paper cited a source as saying.

Christine Lagarde, head of the International Monetary Fund, said she found it “a bit surprising” that the SNB had not warned her of the move.

The Swiss central bank justified the change in policy by saying the “overvaluation [of the franc] has decreased” since the introduction of the cap more than three years ago, although it remains high.

“In these circumstances, the SNB concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified,” it said in a statement, according to the Wall Street Journal.

As well as abandoning the cap, SNB said it will lower its target range for the three-month Libor rate to minus 1.25 percent to minus 0.25 percent, from the existing range of minus 0.75 percent to 0.25 percent, effective immediately.

The central bank’s move came as it had faced growing questions over its bloated balance sheet as its attempts to keep the franc weak resulted in a record pile up of 495 billion francs in foreign currencies, FT noted.

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FL/RC

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