The Swiss National Bank set a ceiling on the value of the country's strong currency on Tuesday, using what experts called a last-ditch "nuclear option" to protect its economy and keep exporters competitive.
The bank said it would spend whatever it takes to keep the currency from strengthening beyond 1.20 francs per euro and indicated it might take more measures to weaken it further.
"The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss and carries the risk of a deflationary development," the bank said in a statement that announced the goal of "a substantial and sustained weakening of the Swiss franc."
The euro, which had been trading around 1.10 francs before the announcement, shot up to 1.2024 afterward. The Swiss stock market cheered the move, with the main index jumping 4.7 percent.
The SNB said it would "no longer tolerate" an exchange rate below the minimum of 1.20 francs per euro and would "enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities."
But it said even the rate of 1.20 francs per euro was too strong for the franc and "should continue to weaken over time." It said it was prepared to take further measures to make that happen.
International traders put their money into Swiss money accounts, causing the franc to jump in value, when global stock markets are volatile, as they have been lately. The Swiss economy also has been faring better than most other nations in debt-saddled Europe, where the financial sector and governments are being forced to cut spending.
Jennifer McKeown, a European economist at London-based Capital Economics, called the decision "a bold move" even though 1.20 francs per euro is still relatively strong for the Swiss currency.
"With exports clearly at risk of slumping, the bank must have felt that it had no other choice," she said in a note to investors.
Switzerland's export-driven economy has long thrived on sales of foods like chocolate and cheese, as well as pharmaceuticals, watches, special machinery and tools. Its main trading partners are Germany, the United States, Italy and France.
The Swiss government says that because of the soaring franc, it expects a slowdown in growth from 2.4 percent last year to 2.1 percent for 2011, and to 1.5 percent in 2012.
Overall exports rose by 0.9 percent in the second quarter, helped by sales of chemicals and watches. But the government said exports of some other items such as jewelry, precious metals, machinery and electronics were on the decline.
The last time the Swiss franc's value was limited in a similar manner was 1978, when its exchange rate against the German mark was lowered. That was achieved at a huge cost, however, said Simon Derrick, a senior analyst at The Bank of New York Mellon.
Derrick said the SNB must now feel added pressure managing its cash reserves, after announcing in July a loss of 9.9 billion francs on its foreign exchange holdings for the first half of the year.
"By its promise to buy 'unlimited quantities' of foreign currencies it has effectively agreed to provide an artificially cheap exchange rate for anyone who wishes to seek a safe haven from the uncertainties of the eurozone," he wrote.
The European Central Bank's governing council issued a terse statement immediately after the announcement indicating they had no role in the Swiss currency move.
"The governing council takes note of this decision, which has been taken by the Swiss National Bank under its own responsibility," the ECB said.
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