The Swiss National Bank stunned financial markets on Tuesday by setting a ceiling for the Swiss franc against the euro in an attempt to prevent the strength of its currency from pushing its economy into recession.
     The central bank said it would set a minimum exchange rate of SFr1.20 against the euro. The SNB action came after previous measures to weaken its currency proved ineffective as the worsening eurozone crisis prompted a flight to safety by investors， boosting haven demand for the franc and sending it up to record levels.
Analysts said the move raised the stakes in the global currency war as countries vie to protect their exporters and, by removing a release valve for investors looking for a haven from current market turmoil, could heighten instability on financial markets.
    “The start of full-on currency wars has started in earnest,” said Maurice Pomery, chief executive at Strategic Alpha. “After currency wars come trade wars and as we see the exporting world pressured as the developed world contracts, tensions will rise.”
     The surprise move prompted the franc to fall 8.2 per cent against the euro to SFr1.2015 in a matter of minutes and to lose 8.8 per cent against the dollar to SFr0.8563. Switzerland’s stock market surged, with Zurich’s SMI gaining 4 per cent.
     The SNB said the current massive overvaluation of the Swiss franc posed an acute threat to the Swiss economy and carried the risk of pushing it into delflation.“The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc,” the central bank said in a statement.
   “With immediate effect, it will no longer tolerate an exchange rate in the euro against the Swiss franc below the minimum rate of SFr1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.”
     The SNB added that: “even at a rate of SFr1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.”
     The move was a significant departure for the central bank, which in recent weeks has been attempting to rein in the franc by flooding the money market with liquidity and using FX swaps to drive interest rates lower.
     The commitment could expose the SNB to further massive losses. The central bank, which is in part privately owned, lost almost SFr20bn last year after fruitless interventions in the foreign exchange markets in 2010 left it holding massive quantities of euros and dollars, whose value steadily declined in Swiss franc terms.
     Although the SNB abandoned its intervention strategy in July 2010, the bank suffered further losses of about SFr10bn in the first half of this year as its foreign currency holdings further declined in value against the surging franc.
Many predicted that the market would test the central bank’s resolve, given that a major source of the strength of the franc – concerns over eurozone government debt – were beyond its control.
     Lena Komileva, a strategist at Brown Brothers Harriman, said the move marked a shift in the SNB’s strategy to weaken the franc from a covert psychological war with the market to open arm-wrestling.
    “Since the euro remains in a vortex of deteriorating structural, cyclical and financial systemic risks, the incentives for the market are now aligned one-way to sell the euro at the overvalued level set by the SNB,” she said.
    “This will leave the SNB intervening in the market on a continuous daily basis to protect the peg, with volatile and disorderly euro capital markets only diminishing the SNB’s psychological threat.”
      Guido Mantega, Brazil’s finance minister who warned on currency wars last year, described the setting of a peg by the Swiss central bank as an act of “desperation”. Brazil has launched numerous currency and capital controls to try to limit the real’s appreciation. “We don’t need to [set a peg]. It’s always better to work with a floating exchange rate,” he said.
     Analysts said the SNB’s intervention could prompt retaliatory action from other central banks, potentially prompting Tokyo to launch a fresh attempt to weaken the yen, which like the franc has been driven to record levels as investors have sought a haven from market turmoil.
    “The announcement now raises the potential risk that other central banks will also make surprise announcements to deal with this new round of risk aversion,” said Divyang Shah, analyst at IFR Markets.
Separately, one of Switzerland’s leading economic forecasters warned on Tuesday the economy was on the brink of a recession because of the strong currency and weakening world economy.
     BAK Basel cut its forecast for Swiss economic growth next year to just 0.8 per cent, less than half the 1.9 per cent estimated for this year.
   Additional reporting by Joe Leahy in São Paulo