The Swiss Franc Soars As Markets Dip, And That Worries The Swiss

Aug 3, 2011

The currency of Switzerland has soared to record highs against the U.S. dollar and the euro. And that has the Swiss government worried, as a stronger franc also makes the country's exports more expensive.

Investors have rushed to buy Swiss francs, seeing them as a safe haven. In much the same way, gold prices have soared in recent times of economic uncertainty. Gold hit a new record this week, trading at $1,661 an ounce.

Three years after recording its recent previous high of around $1, which it hit in April 2008 and again in October 2009, the Swiss franc hit $1.30 this week. It has surged against the euro, pound and yen, as well.

For Newscast, Eleanor Beardsley filed this report from Paris:

The Zurich-based Swiss National Bank cut interest rates as close to zero as possible and says it plans to boost the supply of Swiss francs this week.

Its interventions in the currency markets are an attempt to cool the rally around the Swiss franc since the dollar and euro have been mired in debt crises.

The bank said it considers the franc to be "massively overvalued," and that its strength "is threatening the development of the economy and increasing the downside risks to price stability in Switzerland.

The Swiss National Bank's efforts seemed to be having the desired effect, as the Swiss franc lost some ground against the euro and the dollar for the first time in a week.

The rate cut worked, sending the franc down 2 percent against the dollar Wednesday. Swiss bankers dropped the interest rate to an ultra-low target band of 0.00-0.25.

But that move is expected to have only short-term effects, and investors believe Switzerland's top banking officials won't intervene in the market again soon. And analysts say there aren't many other good options out there, any way.

"With the U.S. dollar not playing its traditional role as flight-to-quality vehicle, the flight from a wide array of risky assets is being funneled and concentrated into very few alternatives," Alan Ruskin, global head of G10 currency strategy at Deutsche Bank in New York, tells Reuters. "In the world of fiat currency, the list of risk-aversion beneficiaries includes only one currency, the Swissie."

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