Belfast Telegraph

Shock as Swiss Bank weakens currency

By David Elliot

A dramatic move by the Swiss Central Bank to weaken its currency has sent shockwaves through currency markets as worries over the health of the world's economy intensify.

The Swiss National Bank (SNB) said it would buy "unlimited quantities" of foreign currency in an effort to drive down the value of the Swiss Franc, a currency that has surged 20% since the start of the year.

The announcement did just that, immediately devaluing the region's currency and driving up the value of the euro, a move that should aid exporters from Northern Ireland if it lasts.

Behind the bank's move - described as unprecedented by currency traders - is the fact investors have been rushing to buy the Swiss currency over the last few months to protect against the second wave of financial turmoil that has gripped some of the world's largest economies.

Its safe haven status meant the value of the Swiss currency climbed from around 1.30 francs/euro earlier in the year to near parity at one stage over the last few weeks.

While revelling in its relatively resilient economy, the move put the country's exporters at a disadvantage and could have endangered its longer-term recovery. A strong Swiss franc means buyers using other currencies have to pay more for Swiss products.

"The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development," the Swiss National Bank said in a statement. "The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of 1.20 francs."

While the bank's move helped boost the Swiss stock market, jitters over the state of sovereign debt in Europe and the US economy sent bank shares around the world lower despite a more positive performance by some of the main indexes.

US shares were particularly hard-hit as investors feared lenders face a growing list of lawsuits due to problem mortgages.

But it is the fragility of the European sovereign debt that is at the forefront of investors' minds with contagion from Greece's precarious situation weighing heavy.

"There's a sense that there's no lifeboat out there," said Paul Atkinson from Aberdeen Asset Management.