CURRENCIES don't tend to move 7-8% in one day in the modern era but the Swiss National Bank has achieved the feat today. It announced a "minimum" exchange rate target of 1.20 francs per euro ( here is the announcement) and the markets fell into line. In reality, the target rate is a ceiling, not a floor; if you turn the cross-rate round, the Swiss want the franc to be worth no more than 83.33 euro cents.
As was remarked in a previous column, the Swiss franc has been rivalling gold as a safe haven and the authorities are worrying, as the statement shows, about the deflationary threat. So it will create Swiss francs to buy "unlimited" amounts of foreign exchange. Since the target rate is based on the euro, presumably it will buy euros. Traditionally, we think of central banks as pursuing the opposite policy; using its foreign exchange reserves to buy the domestic currency (like the UK's doomed effort in 1992). But this is doing the opposite, creating Swiss francs to accumulate reserves. And, in theory the scope is unlimited; the Bank of England ran out of resources in 1992, but the SNB can create francs without number.
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