Swiss Franc Falls to Five-Week Low Against Euro After EU Summit

on Jul 3, 2012

Last week the Swiss franc dipped to its lowest level against the euro since May 24, as EU chiefs acted and approved recapitalisation of Spanish banks reduced demand for the currency as a haven. Notwithstanding the mixed reaction to the EU summit held in Brussels on June 29, European leaders finally took a decisive step by tackling the EU’s banking problems. EU leaders made a decision to ease the conditions on potential help for Italy and the repayment rules for emergency loans to Spanish banks. After 13-hour talks the chiefs of the European countries also agreed that banks can be recapitalised directly with European bailout funds rather than being channelled through governments. These decisions strengthened the single currency against the Swiss franc, surely a relief to the small country’s financial strategists who have been buying swathes of euro in an attempt to protect exports against an overly strong franc.

However, the Swiss franc strengthened against the dollar, snapping a four-day decline, after an index of Swiss leading economic indicators improved last month. On the other hand, Switzerland’s currency declined 0.1 per cent to 1.2016 per euro on June 29 after falling to 1.20389 — its weakest level in the last five weeks.
!m[](/uploads/story/147/thumbs/pic1_inline.png) “We’re seeing quite a spike in euro-franc in the wake of this summit outcome,” said a currency strategist at HSBC Holdings Plc in London, Daragh Maher. “We’ve had a couple of examples with euro-franc where the market has been caught wrong-footed and has been squeezed higher. This spike today may simply be the latest example,” Mr Maher further commented on the recent currency’s drop.

The Swiss franc edged up towards parity with the euro last year, reaching 1.008 on August 9, as turmoil in the EU increased the demand for the safety of the franc. Fearing that a strong Swiss franc would be disastrous for its exporters, Switzerland said last summer that it would not allow the euro to be worth less than 1.20 francs. That meant keeping Swiss interest rates at just above zero while buying euro to keep the franc from falling. That caused the country’s foreign exchange reserves to soar, but its exports are still declining.

The Swiss central bank’s policy of enforcing its currency ceiling is appropriate to prevent deflation, the bank’s president Thomas Jordan said. “We are enforcing the minimum exchange rate with all determination because it is the right monetary policy,” he explained and stated that the Swiss franc is still a very highly valued currency.
Meanwhile the Swiss KOF Leading Indicator, which aims to project the economy’s direction approximately six months into the future, grew to 1.16 points in June, from 0.80 in May, according to data released on June 29, by the Swiss Institute for Business Cycle Research. Previous estimates by analysts expected less increase of 0.85.


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