The Swiss National Bank opted for the ‘nuclear option’ today and set a minimum exchange rate of the Swiss franc to the Euro of CHF1.20 per euro.
The Swiss franc has been getting steadily stronger recently as more investors were attracted to it as a safe haven in these turbulent economic times.
The downside of course is that the country’s exports of chocolate, cheese and its other famous products suffered as a result. Whereas before the flight to safety began the Swiss economy had been doing rather well.
"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 its statement and said that it wanted "a substantial and sustained weakening of the Swiss franc."
The euro rocketed from CHF1.10 to CHF1.2024 on the news.
The SNB said that it would not ‘tolerate’ an exchange rate which was below 1.20 francs per euro and that it would "enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities."
But even at this level the SNB said that the franc was too strong and that it should “continue to weaken over time” as it took measures to ensure this happened.
The move does not come as a complete surprise as some sort of action had been required by the SNB to limit the strength of the franc. But it was the level at which it was set that may have been surprising.
The ECB, which shows they had nothing to do with this decision, said in a short statement "The governing council takes note of this decision, which has been taken by the Swiss National Bank under its own responsibility,"
But even if the franc is pegged to the Euro, will it stop people buying it on the fear factor? And how much will it cost to defend it?