The Swiss National Bank (SNB) set a ceiling on the value of the country’s strong currency on Tuesday, using what experts called a last-ditch "nuclear option" to protect its economy and keep exporters competitive.
The bank said it would spend whatever it takes to keep the currency from strengthening beyond 1.2 francs per euro and indicated it might take more measures to weaken it further.
"The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss and carries the risk of a deflationary development," the bank said in a statement that announced the goal of "a substantial and sustained weakening of the Swiss franc."
The euro, which had been trading around 1.1 francs before the announcement, shot up to 1.2024 afterward. The Swiss stock market cheered the move, with the main index jumping 4.7%.
The SNB said it would "no longer tolerate" an exchange rate below the minimum of 1.2 francs per euro and would "enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities."
Switzerland’s bold move to set a minimum exchange rate against the euro for its soaring franc may force Tokyo's hand and prompt it to intervene to weaken the yen if the Swiss action diverts more safe-haven inflows into the Japanese currency.
Fears of a fresh global recession have spurred investors around the world to dump riskier assets such as stocks and seek the relative safety of gold and the Swiss and Japanese currencies.
"The Swiss franc has been the No. 1 safe-haven currency, followed by yen. So it is possible that the yen will attract more buying as investors flee risks, although the initial reaction was dollar's spike versus the yen," said Yuichi Kodama, economist at Meiji Yasuda Life Insurance.