Sleepy Switzerland jolts currency market

Switzerland stunned markets Thursday by allowing its currency to trade freely against the euro.

The Swiss National Bank introduced a cap of 1.2 Swiss francs to the euro during the eurozone crisis in 2011 as a flood of cash sought refuge in the traditional safe haven.

Switzerland was worried that a rapid appreciation in its currency would slam exporters and cause deflation in its economy.

“This exceptional and temporary measure protected the Swiss economy from serious harm. While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate,” the central bank said in a statement.

The announcement sent the franc soaring against all major currencies. By late morning Thursday, the franc was approaching parity with the euro, up 13%. It gained similarly against the dollar to stand at $1.13.

The surprise move also caused stock markets across Europe to reverse early gains, and U.S. stock futures fell.

Some analysts said the Swiss central bank may have felt compelled to drop the currency peg in anticipation of a big move next week by the European Central Bank.

The ECB is widely expected to announce stimulus measures on January 22. That will flood the market with euros, making it difficult for the Swiss to defend a fixed exchange rate with the currency of its major trading partner.

However, in an effort to ensure investors don’t get too excited about swapping their money for francs, the central bank also pushed interest rates further into negative territory, down from -0.25% to -0.75%.

“It’s like a tax on people holding money in Swiss francs,” said Simon Smith, the chief economist at FxPro in London.

Source: http://money.cnn.com/2015/01/15/investing/switzerland-euro-currency-ceiling/index.html?iid=Lead

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