Switzerland’s central bank has turned the tables on investors who have buying the Swiss franc as a safe haven and driving up its value against other currencies.
The Swiss National Bank shocked foreign exchange markets by setting a minimum exchange rate target of 1.20 francs to the euro.
The franc’s rally has been threatening the Swiss economy by making the country’s exports too expensive.
Using some of the strongest language from a central bank in the modern era, the SNB said it would defend the 1.20 franc target by buying other currencies in unlimited quantities.
The move immediately knocked about eight percent off the value of the franc, which had soared by a third since the collapse of Lehman Brothers in 2008. During that time investors used it as a safe haven from the euro zone’s debt crisis and stock market turmoil.
Analysts said that the SNB should be able to defend 1.20 as it can print unlimited francs but that long-term success depended on efforts to deal with the euro zone’s debt problems.
“The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development,” the SNB said in a statement.
“The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.”
The move was seen as a new shot in the currency wars, with Japan expected to try to weaken the yen if the Swiss action diverts more safe-haven inflows into the currency.
Gold, which hit a record higher earlier on Tuesday, is also seen as gaining.