The Swiss National Bank stepped up its efforts to tame a runaway franc on Wednesday but stopped short of direct intervention, disappointing markets that had positioned for more radical measures and sending the currency sharply higher.
The central bank said it would boost liquidity by expanding banks' sight deposits to 200 billion francs from 120 billion francs and take additional steps if needed, even as the government ran the rule over possible measures of its own to offset the impact of the currency's gains on economic growth.
The franc rose as much as 2 percent against the euro after the SNB announcement, which fell short of expectations the bank might set a lower limit for the euro-franc exchange rate, with some anticipating an announcement on Wednesday.
The market was expecting far more radical measures ...like targeting a specific exchange rate. This is more of the same, and is inadequate in an environment where investors are seeking safe havens, said Lena Komileva of Brown Brothers Harriman.
Worries about the global economy and debt in the euro zone and the United States have prompted investors to pile into the safe-haven franc.
As a result it has soared from one record to another against the euro and the dollar, serving up a policy dilemma for a central bank anxious to safeguard Swiss jobs and exports but which got its fingers burned when it last intervened in markets to rein in the currency in 2009/10.
This time, the SNB has so far responded to the rapid gains by slashing its already low interest rate target to virtually zero and flooding the market with francs.
The currency retraced some of the gains at the end of last week and the start of this week, falling about 10 percent against the euro to around 1.13 after strong rhetoric from the SNB and rallying political support made the prospect of intervention seem very real.
The central bank reiterated on Wednesday it was ready to take further steps to cap the franc's strength if needed, after policymaker Jean-Pierre Danthine said last week no option was being ruled out -- though some solutions were more practical than others.
The SNB seems very determined to do what it can to reduce pressure on its currency and it still has more extreme cards in its hand that it could play depending on market conditions, said Kathleen Brooks, Research Director at Forex.com.
So while there may not be a euro peg today that doesn't mean there won't be one tomorrow.
Swiss officials are under increasing pressure to take decisive action as the franc's gains start eroding economic growth.
Even globally diversified companies like drug firm Roche and watchmaker Swatch Group have started to report an impact on earnings, while the franc is also weighing on the country's banking sector.
Trade union members gathered in front of the SNB and Swiss parliament on Tuesday to voice their frustrations, repeating warnings that tens of thousands of jobs could be at stake if the SNB fails to put a lid on the franc's appreciation.
Eyes are now on what measures the Swiss government might take after a cabinet meeting on Wednesday.
Newspaper TagesAnzeiger reported on Wednesday the government could unveil a 1.5 billion franc package to bolster small and medium-sized businesses, as well as the hospitality and tourism sectors.
The cabinet may hold a press conference later on Wednesday, or possibly on Thursday, to lay out these measures.
One option that has been touted is introducing negative interest rates -- forcing banks to charge clients to hold their money -- something Switzerland last saw in the 1970s and which was used more recently by Japan.
But this has had little success in the past and the government rejected imposing a charge on offshore accounts as well as imposing capital controls earlier this summer.
Meanwhile, deflationary conditions are already taking hold on Swiss money markets.
The December 2011 Euroswiss contract is trading at 100.11, up from 100.08 on Tuesday and 100.06 at the start of the week, implying an expected three-month Swiss franc Libor rate at -0.11 percent in December..
Adding more liquidity will push implied yields further into negative territory, but FX traders say it is unlikely to discourage investors seeking safe-haven currencies as yet.
To reach the new 200 billion franc mark in sight deposits, the SNB said it would use foreign exchange swaps and repurchase its own debt -- called SNB bills.
(Additional Reporting by Katie Reid; Editing by John Stonestreet)