Swiss Franc Drops by Record in Week Versus Euro on Intervention

By Lukanyo Mnyanda and Joshua Gallu

March 13 (Bloomberg) -- The Swiss franc posted its biggest weekly decline against the euro since 1999 after the country’s central bank sold the currency to halt a 7.6 percent appreciation in the past six months.

The franc was also near the lowest level versus the dollar in three months after the Swiss National Bank’s first solo intervention in foreign-exchange markets since 1992. The SNB also said it will buy corporate bonds as it cut the benchmark three- month Libor target rate to 0.25 percent from 0.5 percent to revive the economy.

“The franc has hit a brick wall,” said Martin McMahon, a currency strategist in Zurich at Credit Suisse Group AG. “The SNB action clearly took the currency markets by surprise and its appreciation trend is now over.”

The franc weakened 0.3 percent to 1.5345 per euro by 3:45 p.m. in Zurich. It tumbled 4.6 percent this week, the most since the common currency was introduced in 1999. The franc slipped 0.3 percent to 1.1884 versus the dollar, from 1.1577 on March 6.

The Swiss economy will slump by as much as 3 percent this year, the most since at least 1975, the central bank said yesterday. Price pressures have evaporated in recent months as oil prices sank, the franc strengthened and domestic demand dropped. Prices will probably decline this year and inflation will be “very close to zero” in 2010 and 2011, the SNB said.

The franc’s appreciation has made Swiss products less competitive in Europe and the U.S., where deepening recessions were already curbing demand. Lindt & Spruengli AG, the nation’s oldest chocolatier, faces the most challenging period in its 164- year history as franc gains hurt earnings and consumers pare spending, it said Jan. 20.

‘Currency Problem’

“Business isn’t easy right now because of the economic crisis,” said Jean-Daniel Pasche, head of the Federation of the Swiss Watch Industry in Biel. “If on top of that we have a currency problem, that really penalizes us on exports.”

The franc surged 6 percent against the dollar and 11 percent versus the euro in 2008 as investors sought refuge from the global financial crisis.

“Swiss industry cannot afford a euro exchange rate of 1.50,” Luzi Andreas von Bidder, chairman of Acino Holding AG, a generic-drug maker, said yesterday in an interview after the central bank announcement. Acino would lose about 8 percent in revenue due to exchange rates this quarter if the franc remained at the level prior to the SNB’s announcement, he said.

‘Lowers Pressure’

Swiss manufacturing contracted at the fastest pace since at least 1995 last month, helping to push unemployment to a more than two-year high. Sika AG, Europe’s biggest maker of chemicals used in construction, said last month fourth-quarter sales slid 6.5 percent, hurt by the franc’s appreciation and weaker demand in the construction and auto industries.

“Everything the SNB can do to support the euro at 1.60, or lets say 1.55 instead of 1.49, is more than welcome. Of course it’s good news because we sell more to Europe than we buy,” said Philippe Maquelin, chief financial officer of Moutier, Switzerland-based Tornos SA, Europe’s biggest maker of lathes for the watch industry. The company generates more than 50 percent of its sales in the euro area.

“The intervention really lowers the pressure on our industry,” said Rudolf Christen, a spokesman for Swissmem, the biggest association for machinery and engineering companies in the country. “If the rate falls below 1.50 for a few weeks, it’s not a big problem. But if it’s long lasting, which it was, that really raises the pressure.”

UBS AG raised its one- and three-month targets for the euro against the Swiss franc yesterday.

The euro will trade at 1.52 francs in one and three months, Benedikt Germanier, a currency strategist in Stamford, Connecticut, said in a research report. The previous forecast was for 1.49 francs per euro in one month and 1.47 in three months, UBS said.

BOJ Action

The last time policy makers from one of the Group of 10 industrialized nations acted to weaken a currency was when the Bank of Japan sold 35.2 trillion yen ($360 billion) in 2003 and 2004. Instead of falling, the yen strengthened about 6 percent against the dollar in the year after sales ended.

“The local bond market is limited in Switzerland and the capacity for the SNB to increase domestic money supply through buying franc-denominated bonds is going to be low,” Mansoor Mohi-uddin, chief currency strategist in Zurich at UBS, wrote in a note. “In order for them to loosen the market condition further, they will have to intervene aggressively in the currency market.”

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Joshua Gallu in Zurich jgallu@bloomberg.net