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Swiss bid to peg ‘safe haven’ franc to the euro stuns currency traders

Move – which effectively devalues the Swiss franc in an attempt to protect the economy – sparks fears of new currency war

Switzerland sparked fears of a new currency war on Tuesday after it pegged the Swiss franc against the euro, in an attempt to protect its economy from the European debt crisis.

The Swiss National Bank effectively devalued the franc, pledging to buy “unlimited quantities” of foreign currencies to force down its value. The SNB warned that it would no longer allow one Swiss franc to be worth more than €0.83 – equivalent to SFr1.20 to the euro – having watched the two currencies move closer to parity as Switzerland became a “safe haven” from the ravages of the eurozone crisis.

The move stunned currency traders, and sent the Swiss franc tumbling against other currencies. Jeremy Cook, chief economist at currency brokers World First, said it was “intervention on a grand scale”, and the start of a “new battle in the currency wars”.

“That was the single largest foreign exchange move I have ever seen … The Swiss franc has lost close on 9% in the past 15 minutes. This dwarfs moves seen post Lehman brothers, 7/7, and other major geo-political events in the past decade,” Cook said.

The SNB pledged to enforce a “substantial and sustained weakening of the Swiss franc”, adding that it might move to an even lower exchange rate against the euro if needed.

“The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development,” said Switzerland’s central bank.

The Swiss franc settled around SFr1.2026 against the euro, having earlier hit SFr1.1020. Stock markets rallied on the news, with the FTSE 100 jumping 87 points or 1.7%. The main Swiss stock market gained more than 5%.

Jennifer McKeown of Capital Economics, said the SNB’s intervention was a “bold move”, but warned that Swiss exports will probably still suffer as the Swiss franc still remains strong on historical terms.

Giles Watts, head of equities at City Index, warned that Switzerland could find itself in a battle with currency speculators to hold the value of its currency down.

“Most interventions in the currency markets by the authorities of late has only helped prices in the short term at best. If the euro crisis intensifies there is every chance the market could test the SNB’s resolve to hold the cross rate above the 1.20 level,” Watts said.

Back in April, one euro was worth SFr1.32. The strength of the Swiss Franc has made the country’s exports much more expensive and harmed its tourism business, and also encouraged some Swiss residents to cross the border into Germany to do their shopping.

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