Market Extra
Sept. 6, 2011, 6:09 a.m. EDT
Franc plunges as Swiss set euro-franc floor
SNB vows to buy ‘unlimited quantities’ of euros to defend rate
By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — The Swiss franc plunged dramatically versus the euro and other major rivals Tuesday after the Swiss National Bank took the extraordinary step of setting a floor for the euro/Swiss franc exchange rate at 1.20 francs and vowed to buy “unlimited quantities” of euros to defend it.
In a breakneck swing, the euro (ICAPC:EURCHF) traded at 1.2033 francs, up from around 1.12 francs ahead of the announcement, a rise of 8.9%, as traders stampeded out of short euro/Swiss franc bets. Other currencies also rose versus the franc, with the U.S. dollar (ICAPC:USDCHF) jumping 8% to trade at 84.85 centimes. There are 100 centimes in a franc.
Swiss equities, which have been hurt by fears a strong franc undercutting Swiss exports, also jumped. The Swiss Market Index (SWX:CH:SMI) rallied 4.7% to 5,387.30, with offshore drilling firm Transocean Ltd. (NYSE:RIG) (SWL:CH:RIGN) up 8.9% and staffing firm Adecco SA (SWL:CH:ADEN) up 6%.
“With immediate effect, [the SNB] will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities,” the SNB said.
But analysts said the SNB’s toughest battle lies ahead, particularly if ongoing tensions in the euro zone continue to stoke investor appetite for safe havens.
“This is an endurance contest whereby the SNB needs to fight hard against a market that could soon test its resolve,” said Paul Mackel, currency strategist at HSBC in Hong Kong. “Putting EUR-CHF at 1.20 today is the easy part. Keeping it there or significantly above will be difficult if the world still looks like a gloomy place.”
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