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Swiss stoke fears of 'currency wars'

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Swiss stoke fears of 'currency wars'

Postby Netanel » Tue Mar 17, 2009 12:48 pm

The Swiss National Bank sparked talk of a global currency war yesterday when it intervened to weaken the Swiss franc, the first time a big central bank has intervened in the foreign exchange markets since Japan sought to weaken the yen in 2004.

The Swiss franc's haven status has been heightened by market turmoil, pushing it close to a record high of about SFr1.43 to the euro in the past few weeks.

But it fell to its lowest level this year yesterday after the SNB said the currency's strength represented an "inappropriate tightening of monetary conditions" as it battled against a slowdown in the Swiss economy.

"In view of this development, the SNB has decided to purchase foreign currency on the foreign exchange market to prevent any further appreciation of the Swiss franc against the euro," the central bank said.

Traders confirmed that SNB had been active in the market, selling the Swiss franc against the euro and the dollar. The currency dropped 2.6 per cent to SFr1.5192 against the euro and 3.2 per cent to $1.1894 against the dollar.

Analysts said the move was likely to increase speculation that countries were set to engage in a bout of competitive devaluation.

"Let the currency wars begin," said Chris Turner at ING Financial Markets.

Countries around the world faced with the constraint of zero interest rates might feel it was acceptable to weaken their currencies in order to ease monetary conditions, he said.

"Of course those with higher exports shares in GDP will have monetary conditions more sensitive to [foreign exchange] rates. Japan will probably be at the head of the queue."

The SNB said economic conditions had deteriorated sharply since its last policy meeting in December and there was a risk of deflation over the next three years. "Decisive action is thus called for, to forcefully relax monetary conditions."

The SNB also cut its interest rates by 25 basis points, taking its three-month Libor target range down to 0-0.75 per cent.

It also announced plans to adopt a quantitative easing, saying it would in-crease liquidity by engaging in additional repo operations and buying Swiss-franc denominated bonds issued.

Analysts said the move towards quantitative easing was sparked by a drastic revision to the central bank's forecast for growth, which is now expected to fall by 2.5-3 per cent in 2009, much worse than its previous forecast of a drop of 0.5-1 per cent.

Expect more currency wars


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