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Friday, March 13, 2009

Swiss Central Bank Intervened To Halt Franc Rise

Faced with a deepening recession and deflation, the Swiss National Bank
intervened directly in foreign exchange markets Thursday to prevent the Swiss
franc from rising further.

The central bank's adoption of quantitative easing had an immediate and major
effect on foreign exchange markets, although the cut in its three-months Libor
target to a historical low of 0.25% from 0.5% was deemed a largely symbolic.

"With these exceptional measures, the SNB is helping to cushion the effects
of the economic and financial crisis, with the aim of limiting the risk of
deflation," the SNB said in a statement.

The franc fell hard on a combination of the SNB policy announcement and
actual intervention in markets. The franc's most important rival, the euro,
scored its biggest one-day gain ever against its Swiss counterpart, while the
dollar also rose sharply.

The Swiss bank is the first central bank with a major currency to intervene
openly in foreign exchange markets in about six years.

In addition to directly selling francs and lowering the fluctuation band for
the three-month Swiss franc London interbank offered rate, it also said it will
engage in additional repo operations and buy Swiss franc bonds issued by
private sector borrowers. The Swiss National Bank said it expects prices to
contract 0.5% in 2009.

The SNB thereby joined the ranks of major central banks such as the Federal
Reserve and Bank of England that have adopted unconventional steps to deal with
the global credit crunch and economic downtown, a further indication of just
how serious the situation has become.

The franc has been appreciating against a number of currencies on its status
as a haven asset since the onset of the financial crisis in August 2007 - a
move that gained momentum last December.

For Switzerland, which depends heavily on exports for growth, the franc's
appreciation undermines the competitiveness of Swiss companies at a time when
they are already faced with a slowdown in global growth.

The move had broad implications on the foreign exchange market, leaving few
widely traded currencies unaffected.

The SNB decision also shifted attention to the Bank of Japan, which is facing
similar problems with deflation and a strong currency. Given its earlier
history of active operations to stem yen appreciation, traders are now on the
alert for the possibility of BOJ intervention. In response, the yen fell to
session lows against the euro and dollar after the SNB's announcement.

However, the resumption of intervention by the Swiss National Bank or even
the Bank Of Japan doesn't necessarily signal a wave of central bank actions to
depreciate currencies. Emerging markets as diverse as Mexico, South Korea,
Russia and Hungary have all taken measures to stem the fall of their

Central and Eastern European currencies that have been under pressure for
months also benefitted from the Swiss central bank's intervention. By selling
francs, the SNB added more liquidity into the system and eased funding
pressures that have been plaguing the currencies of Poland and Hungary in
particular for months.

The zloty and forint rallied against the euro in response. The forint should
also find support after the National Bank of Hungary announced it will start
converting the net current and capital transfers from the European Union on the
foreign exchange market. The Ministry of Finance expects around EUR2.4 billion
to be converted in 2009.

A large portion of the loans taken out in Poland and Hungary were denominated
in Swiss francs due to the country's traditionally low interest rate. But as
local currencies declined in the wake of the global crisis over the last year,
the prospect of repaying these loans turned into a major cause of concern. The
potential impact on the broader economy manifested itself in a selloff of local

Late in New York, the euro surged in a late-day rally against the dollar and
yen as it became clear that U.S. stocks would achieve a third consecutive day
of gains. The building advance in equities removed some of the uncertainty
surrounding recent gains, and supports the idea that the U.S. economy may have
hit its bottom point.

As a result, traders sold off what are considered safer currencies, the
dollar and yen, and bought the euro.

The euro rose to $1.2936, its highest level since Feb. 23. It also advanced
to its highest level against the yen since Jan 8, Y126.40. Late afternoon in
New York, the euro was at $1.2924 from $1.2854 late Wednesday, and the dollar
was at Y97.63 from Y97.27, according to EBS. The euro was at Y126.20 from
Y125.10. The U.K. pound was at $1.3955 from $1.3884, and the dollar was at
CHF1.1844 from CHF1.1522 Wednesday.

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