Following yesterday's announcement by the Swiss National Bank (SNB) to devalue the dangerously-high Swiss franc in order to protect itself from inducing any damage to its economy, particularly its export market, a further twist has unfolded in the latest "currency war". Switzerland has now rejected its floating exchange rate in a desperate bid to stabilise the franc against the euro.
The SNB opted to enforce a minimum rate of 1.20 francs to the euro but foreign exchange strategists believe that the path chosen by the Swiss will further endanger an already fragile European economy. HSBC's global head of foreign exchange strategy, David Bloom has warned that "this is a risky policy for the Swiss" as it will exacerbate the current European debt crisis by increasing the gap between the core European Monetary Union (EMU) and the periphery. He believes that "the market must fear this will lead to a sharp escalation in currency wars."
As a consequence of the SNB's decision to set a minimum rate, the market experienced a sudden fall in the value of the franc as it dived 9 per cent against the euro. The new strategy being deployed by the Swiss is reminiscent of that taken in October 1978 - the final result was a stabilisation of the franc, but it was achieved at the expense of a rapid increase in inflation which reached levels of over 7 per cent in 1981.
The Swiss economy and the performance of the franc in the market are being closely monitored across the world, particularly by the Japanese where the yen has also soared in value, with policymakers warning that intervention may be required to counter the persistent increases.