Swiss National Bank Takes Aggressive Action, Caps Franc

Sep 6, 2011

Planet Money's Jacob Goldstein writes that what the Swiss National Bank did today was essentially tell everyone seeking refuge in their currency to, "Go away. Now."

The Wall Street Journal puts it in more violent terms. They write that SNB has "broken out the boiling oil." The Street says the move marks a shift from "covert psychological war to open arm-wrestling" with the market. So what did SNB do?

They announced, today, it would purchase as many Euros as it takes to keep the Franc from strengthening beyond the 1.20 euro mark. It means the Swiss will purposely devalue their currency, while strengthening the Euro. By devaluing their currency, the Swiss are protecting their exports, because a strong currency makes your exports more expensive.

The risk is very real. Here's The Wall Street Journal on what an expensive Franc had done to the Swiss economy:

The relentless strength of the franc has already pushed some weaker Swiss exporters into bankruptcy, and sent others scrambling to slash prices to hold onto business. Swiss export prices fell 6.2% in the first half of the year. The Swiss government expects 1.5% gross national product growth in 2012, down from 2.1% this year and 2.7% last year.

The question now, reports Bloomberg, is whether this strategy will work. It certainly did today with the Franc dropping 8 percent against the Euro. But some analysts tell Bloomberg that what comes next is an endurance challenge.

"So, this is an endurance contest whereby the SNB needs to fight hard against a market that could soon test its resolve," said Paul Mackel, a senior currency analyst at HSBC Holdings Plc in Hong Kong. "Putting euro-franc at 1.20 today is the easy part. Keeping it there or significantly above will be difficult if the world still looks like a gloomy place."

As for investors, where can they stash money safely outside of gold? The U.S. dollar and the Japanese yen are of course top contenders, but "they have their issues, to say the least," reports the Journal. One analyst tells the newspaper the world might be down to one safe haven outside of gold and that is the Chinese Yuan.

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