The Swiss Franc is sharply weaker against the euro today after a report on Sunday in a Swiss newspaper that the Swiss National Bank will be discussing the possibility of a peg to the euro with the aim of a floor of 1.1000-1.1500 on the currency pair as part of their efforts to curb the excessive appreciation of the Swiss currency recently.
Sources close to the government said that talks are currently under way and plans may be ready in the coming days.
Global financial turmoil helped boost the safe haven currency to record highs against the euro and dollar. As investors realize that the chances of the global economy recovering anytime soon are becoming increasingly remote, they are piling into the Swiss franc, much to the discontent of the Swiss government who is now faced with trying to protect the economy as exports become more expensive.
The Swiss central bank has last week began attempts to curb franc strength by increasing liquidity in money markets and reducing interest rates. However, policy makers from the major political parties have signalled their support to introduce tougher measures to protect the economy as well as prevent job losses that could come as a result of a strong franc and slowing growth due to deteriorating exports.
The July Swiss confidence index showed Swiss consumers became more pessimistic about the economic outlook and job. The government held an extraordinary meeting on the franc on Aug. 8 and forecast growth to weaken over the coming months.
The SNB is an independent organ from the government While the SNB is formally independent, some exceptions are being made now as the Swiss government in “intense” talks with the bank to agree on a target floor price for the euro – swiss pair. The Swiss newspaper SonntagsZeitung reported that the SNB is initially planning on a limit of slightly above 1.10 francs versus the euro before gradually increasing it.
The proposal of a peg to the euro has come under a lot of criticism as some believe it is just a verbal threat by the Swiss central bank as many believe that it will not be put into practice based on the fact that if the SNB does intervene and buys up billions of euros to curb franc strength, what will they do with such a huge amount of euros? Buying bonds from the euro zone economies is not a good idea at the moment. The SNB would have to be desperate to buy up Italian or Greek bonds or even any other EU country bond until there is some indication that Europe has put its act together to contain their debt crisis.