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Swiss action sparks talk of currency war

Section: Daily Dispatches

By Peter Garnham
Financial Times, London
Thursday, March 12, 2009

The Swiss National Bank moved to weaken the Swiss franc on Thursday, the first time a big central bank has intervened in the foreign exchange markets since Japan sought to weaken the yen in 2004.

The bank's move, which sparked fears that other countries could follow suit, comes as the value of the Swiss franc has soared as investors seek a haven from the recent market turmoil. In October, after the collapse of Lehman Brothers, it rose to a record high of about SFr1.43 against the euro, a level it has come close to again in recent weeks.

But it fell to its lowest level this year on Thursday after the SNB said the currency's strength represented an "inappropriate tightening of monetary conditions" as it battled against a slowdown in the Swiss economy.

"In view of this development, the SNB has decided to purchase foreign currency on the foreign exchange market to prevent any further appreciation of the Swiss franc against the euro," the central bank said.

The Swiss franc dropped 2.6 per cent to SFr1.5192 against the euro and dropped 3.2 per cent to $1.1894 against the dollar.

Analysts said the move was likely to increase talk that countries were set to engage in a bout of competitive devaluation.

"Let the currency wars begin," said Chris Turner at ING Financial Markets.

Countries around the world faced with the constraint of zero interest rate levels might feel it was acceptable to intervene to weaken their currencies in order to ease monetary conditions, he said, adding that other export-dependent economies such as Japan would "probably be at the head of the queue."

Michael Woolfolk at Bank of New York Mellon agreed.

"Market intervention by a major central bank such as the SNB opens up the door for other central banks, namely the Bank of Japan, to follow suit," he said. "The yen is widely perceived in Japan to be overvalued."

The SNB also cut its interest rates by 25 basis points, taking its three-month Libor target range down to zero to 0.75 per cent, and announced plans to adopt a quantitative easing approach to monetary policy.

Analysts said the move towards quantitative easing was sparked by a drastic revision to the central bank’s forecast for growth, which is now expected to fall between 2.5 and 3 per cent in 2009, much worse than its previous forecast of a drop of between 0.5 and 1 per cent.

The SNB said economic conditions had deteriorated sharply since its last policy meeting in December and that there was a risk of deflation over the next three years.

"Decisive action is thus called for, to forcefully relax monetary conditions," the central bank said.

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