Hard cheese to investors as Swiss peg franc to euro

The Swiss National Bank has decided to force down the value its franc after days of market turmoil, in an effort to protect its economy. Which won't make the markets particularly happy...

by Emma Haslett
Last Updated: 06 Nov 2012

So it seems the Swiss have lost their patience with the markets, and decided to peg their currency to the euro in an attempt to devalue their currency and protect their economy. The Swiss National Bank announced today that it will 'no longer tolerate' exchange rates below €1.20 to the franc, and that it will buy foreign currency in ‘unlimited currencies’ in order to do so. Gulp.

The franc has been climbing steadily in response to the euro debt crisis and the falling US dollar is the culmination of days of market turmoil, which led the Nikkei to fall by 2% last night. So while it was encouraging that European markets opened slightly higher this morning, with the FTSE 100 rising by 1.3%, France’s Cac 40 up 1% and Frankfurt’s Dax 0.5% higher, chances are that we’re in for a tough week. Until governments can do something to reassure investors, the chances of anything settling down are looking decidedly unlikely…

The reasons behind this latest round of market turbulence are twofold: to begin with, investors are concerned about how high levels of government debt in the eurozone are going to affect the banking sector. Greece got things off to a difficult start by asking holders of its bonds (many of which are banks) to swap them for ones which yield less over a longer period of time – not exactly the most ideal situation for bond holders. The worry now is that other countries (namely Italy and Spain) will have to follow suit – so it follows that banking shares were the first to lose value today, with Germany’s Commerzbank falling by 2.5%, France’s Credit Agricole dropping by 1.1%, and Barclays losing 0.8% (although Deutsche Bank did gain 1.4% – a bit of a mystery, that…).
Investors’ other worry is that governments aren’t dealing with their debts as well as they could be. Simply bailing out anyone who’s in trouble isn’t exactly a sustainable way to keep countries afloat – given that coffers are emptying rapidly and populations are becoming increasingly resentful, someone’s going to have to come up with a better way of doing things, soon. And investors’ confidence hasn’t exactly been bolstered by a raft of disappointing economic data, including a poor performance by the services sector in the UK, low confidence among eurozone businesses and troubling figures from the US jobs market. And not only has the franc been rocketing, but the price of gold has hit another record, at $1,921.41 an ounce.

The impact of those US jobs figures on the markets across the pond has also set off yet another round of speculation among investors and analysts alike that the Federal Reserve is on the brink of a third round of quantitative easing, devaluing the dollar and potentially upsetting its reserve currency status.

So it’s up to governments to do something to mitigate the impact of those poor figures. We’ll get an indication of whether any of their strategies are working when eurozone growth figures are published later today, while President Obama will deliver a much-anticipated speech outlining how he’s planning to create more jobs on Thursday. But hold on to your hats: if the markets don’t like it, things are likely to get worse before they get better…

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