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Thursday, March 12, 2009

Swiss Franc Dives On Intervention

The Swiss franc fell sharply against the dollar and euro Thursday after the Swiss National Bank implemented extraordinary measures to curtail further appreciation of its currency.

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 SNB lowered the fluctuation band for the three-month Swiss franc London
interbank offered rate to 0%-0.75%. It said it will engage in additional repo
operations, buy Swiss franc bonds issued by private sector borrowers and
purchase foreign currency on the foreign exchange markets to increase liquidity
in an effort to fend off deflation.

The SNB said it expects prices to contract 0.5% in 2009. In late January, SNB
Vice President Philipp Hildebrand made it clear the SNB would do whatever it
took to prevent deflation. The central bank also wouldn't shy away from
unconventional steps, he said.

The Swiss central bank has now made good on its promise, taking measures
regarded as appropriate to defend a small, open economy.

Traders confirmed that the SNB had intervened in markets Thursday morning.
It is the first major Group of 10 central bank to intervene openly in currency
markets in about six years.

The move had broad implications on the foreign exchange market, leaving few
widely traded currencies unaffected. The euro and dollar advanced to their
highest levels this year against the Swiss franc as Europe's single currency
scored its biggest single-session advance in its history.

The SNB's actions also led to a decline in the Japanese yen against the
dollar and euro, as well as a rally for European emerging market currencies.

The franc has been gaining against the dollar and euro since late last year
as a safe haven asset.

The announcement caused "a disturbance in markets across board," said
Geoffrey Yu, a currency strategist at UBS in London.

"This will be seen as competitive devaluation," said Yu, adding that by
setting a precedent, the SNB may be tempting other central banks struggling
with similar issues.

"Then, we're going to see a lot of volatility in currency markets," he said.

So far, the euro has gained as high as CHF1.5305, its highest level since Dec
23, from CHF1.4843 before the announcement. The dollar has gained as high as
CHF1.1969, its highest level since Dec 11, from CHF1.1571 before the

"With the SNB's deep pockets, this should be the beginning of further losses
in the Swiss franc," said Kathy Lien, director of currency research at GFT.

Eastern European currencies that have been under pressure for months also
benefitted from the SNB intervention. A cheaper franc eases pressures there.

"One of the pressures on Poland and Hungary derived from a serious currency
mismatch as many mortgages in recent years were denominated in Swiss francs,"
noted Marc Chandler, global head of foreign exchange at Brown Brothers Harriman
in New York. "The strength of the Swiss franc compounded their woes."

However, analysts including Chandler caution that this relief for East
European currencies is short term.

The SNB decision also shifted attention to the Bank of Japan, which is facing
similar problems with deflation and a strong currency.

The BOJ was the last major central bank to intervene in markets. 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, with
the dollar reaching as high as Y98.53 and the euro peaking at Y125.60.

Around midday Thursday, the euro was at $1.2794 from $1.2854 late Wednesday,
and the dollar was at Y97.97 from Y97.27, according to EBS. The euro was at
Y125.32 from Y125.10. The U.K. pound was at $1.3818 from $1.3884, and the
dollar was at CHF1.1905 from CHF1.1522 Wednesday.

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