International Business

Swiss surprise roils currency markets

People line up at a currency exchange office in Geneva on Thursday.
People line up at a currency exchange office in Geneva on Thursday. AFP/Getty Images

The Swiss central bank stunned global markets Thursday by abandoning a crucial part of its three-year effort to hold down the value of its national currency against the ever-weakening euro.

The country had been trying to cap the value of its currency, the franc, as nervous investors fled the market tumult and sought the relative safety of Switzerland. But in the face of a steep decline in the euro, the plan proved too risky and too costly to continue.

The abrupt move sent the value of the Swiss franc soaring, as the country’s stocks broadly plummeted. Exporters, in particular, got slammed, over fears that the rising currency would weigh on profit.

“Words fail me!” Nick Hayek, the chief executive of watchmaker Swatch Group, said in a statement, adding that the action “is a tsunami; for the export industry and for tourism, and finally for the entire country.”

The shocking move underscores the turbulent state of the global economy. Around the world, smaller economies are grappling with how to navigate the aggressive monetary activism of major central banks like the Federal Reserve in the United States and the European Central Bank.

The European Central Bank looks to be on the verge of an extensive new effort to try to pump money into the region’s troubled economy, which is creating downward pressure on the euro. The pressure is particularly pronounced against the dollar, the benchmark of global commerce, which is rising in part because of a strong U.S. economy and plans by the Federal Reserve to raise interest rates.

“Recently, divergences between the monetary policies of the major currency areas have increased significantly — a trend that is likely to become even more pronounced,” the Swiss central bank said in the announcement.

The Swiss policy dates to September 2011, near the height of the sovereign debt crisis in Europe.

As panic set in, investors and savers dumped euros, in favor of the Swiss franc and other safe havens. But the rising value of the Swiss franc threatened to push the country into deflation and created problems for the country’s exporters, which suddenly found their products less competitive overseas. The country’s economy is heavily dependent on those exporters.

In 2011, the Swiss monetary authorities instituted a policy to try to keep the euro to a floor of 1.20 francs, by selling francs and buying euros on the open market. Only last month, it reiterated a pledge to continue to support that floor by buying the euro in “unlimited quantities” if needed.

The Swiss central bank’s support for the euro has been controversial at home. Many exporters had welcomed the commitment to holding down the franc, which the central bank accomplished by selling francs on the open market in exchange for euros, pushing down the franc and supporting the euro.

But as the central bank’s balance sheet grew by several hundred billion euros, the central bank suffered a political backlash from opponents. In a December referendum, such opponents tried to force the central to convert much of its foreign exchange holdings into gold. That referendum failed.

On Thursday, the central bank surrendered to the market dynamics, saying in a statement that it was giving up the minimum exchange rate.

“This exceptional and temporary measure protected the Swiss economy from serious harm,” the central bank said in a statement. “While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate. The economy was able to take advantage of this phase to adjust to the new situation.”

The central bank simultaneously cut interest rates, hoping to offset some of the damage in foreign exchange markets. It reduced the rate that it would charge lenders for certain deposits they hold at the central bank, to minus 0.75 percent from the minus 0.25 percent it had announced last month.

But that was too little to stop the tide, as the franc rose nearly 17 percent against the euro. Swiss stocks also plummeted in value, with investors scrambling to unload equities priced in francs.

Shares of Swatch, the iconic watch brand, fell 16 percent in afternoon trading, leading the Swiss market index more than 10 percent lower.