Is the Swiss franc still a safe haven currency?

The Swiss National Bank (SNB) surprised the markets on Tuesday when it announced that it would not allow the euro / Swiss franc rate to fall below 1.2000, and that it is prepared to spend an unlimited amount buying foreign currencies in order to maintain this price restriction.

In times of economic uncertainty the Swiss franc price tends to rise because it is traditionally considered a safe haven currency. Switzerland is a country with a low national debt and budget deficits and a healthy banking system and when risk aversion in the market heightens, Swiss franc appreciates. In 2011, the eurozone debt crisis has deepened, concerns over the US economic growth have escalated and, as a result, we have seen the Swiss franc rise to record high levels against the euro and the US dollar. This has had negative implications for Switzerland because an overvalued franc puts the country's economy at risk as it threatens its export competitiveness and poses a deflation threat. In addition, the SNB forecasts that growth may slow to 2% this year, pushing back expectations for an interest rate hike.

The SNB responded to Tuesday's Consumer Price Index which revealed Switzerland's inflation dipped by 0.3% in August, and intervened in the currency markets to stop the franc's rise. The announcement of the ceiling on the franc's exchange rate surprised the markets resulting in a dramatic decline of the Swiss franc. Against the franc, the euro rallied 1135 pips hitting 1.2153 from 1.1018. The US dollar also jumped versus the franc, rising to 0.8571 from 0.7839.

The SNB's decision to intervene in the currency markets is certainly impressive but the question is whether the Swiss franc will remain weak while the global economy is under the risk of recession. It seems that the SNB's biggest challenge is to fight against a market which is concerned about the future of the eurozone as well as with the US's sluggish growth rate. Will the SNB manage to keep the peg stable while the euro is gradually losing its luster?

After the franc's collapse, gold jumped to a fresh record high above 1920 dollars per ounce. The SNB's move took away the franc's appeal as a safe haven currency where money flows in times of economic uncertainty. This allows fewer safe haven alternatives for investors who want to avoid risk and it is possible that gold and US dollar higher may move higher. There is also the possibility that risk adverse investors may turn to minor currencies, such as the Norwegian krone (NOK) or the Swedish krona (SEK) as an alternative to the CHF.

Economists also talk about the risk of an escalating currency war among the central banks. Switzerland's aggressive action to weaken its currency keeps the possibility high that more interventions by other central banks will follow as they seek to stimulate their own country's economic growth.

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