Swiss Central Bank moves to curb strong franc

The Swiss Central Bank moved yesterday to stem the rise in the strong Swiss franc by significantly increasing the supply of liquidity as well as cutting its already very low benchmark lending rate.

The measures led to an immediate reaction in the forex markets, with the franc weakening in early morning trade to 1.1087 francs against the euro and 0.7768 against the dollar.

The Swiss Market Index also moved up after an initial plunge at opening, trading 0.62 per cent higher at 5,581.41 points. The stock market has fallen sharply in recent days on worries the strong franc will cripple key exports. For the Swiss National Bank, the franc is “massively overvalued at present” and threatening the Swiss economy.

With the global economic outlook also weak, “the outlook for the Swiss economy has deteriorated substantially,” it said.

It therefore announced that it would aim for “a three-month Libor as close to zero as possible, narrowing the target range for the three-month Libor from 0.00-0.75 per cent to 0.00-0.25 per cent.

“At the same time, it will significantly increase the supply of liquidity to the Swiss franc money market over the next few days,” the central bank said, adding that it would take further measures if necessary.

The Swiss franc has risen sharply in recent months to record highs as investors seek out a safe haven for their money amid growing fears over the eurozone debt crisis and a weakening economic outlook.

But some analysts believe that the SNB’s latest moves will only provide temporary relief.

“It is more rhetoric. As to whether this will lead to sustainable relief, we saw some positive reaction initially but apart from that, I wonder if this announcement will be some kind of a turning point,” said a Julius Baer analyst.

A Unicredit analyst noted however that “although the actual measures do not fundamentally change the situation, the decisive rhetoric of the SNB could help to stabilise the currency.”

He added that the franc could yet touch parity with the euro but with the Swiss growth outlook dimming, the pledge by the SNB to take further action if necessary “has become more credible and more promising.”