Swiss franc hits 1-week high vs euro as SNB keeps rates on hold

LONDON: The Swiss franc rose against the euro on Thursday after Switzerland’s central bank kept interest rates on hold at record lows, defying some expectations that it might act to weaken an overvalued currency.

The Swiss National Bank kept its target range for three-month Libor at between -1.25 and -0.25 percent as expected, but it said it would remain active in the currency market if necessary. The euro fell to 1.08 francs, its lowest in a week, from around 1.0830 francs before the policy announcement.

Before the European Central Bank met last week, most economists polled by Reuters had forecast the SNB would leave rates unchanged. But a third of them, wary that more easing by the ECB would boost the franc, expected the SNB to cut rates.

The ECB loosened policy in steps that nevertheless fell well short of market expectations, pushing the euro broadly higher and taking pressure off the SNB to act and weaken the franc.

“The SNB had the opportunity to ease policy like the ECB and maintain interest rate differentials and discourage inflows. But they chose not to. So we are seeing the euro weaken against the franc,” said Chris Turner, head of currency strategy at ING. “Over a period of time we expect the euro to ease to 1.05 francs, but there is a lot of hard work and you never know where the SNB will come and intervene.” The SNB stressed its willingness to intervene to weaken what it calls a “significantly overvalued” franc.

Currency reserves have ballooned to nearly 563 billion francs, a record high. Credit Suisse economists in November estimated the SNB was buying foreign currency worth around 400-500 million Swiss francs ($900 million) per week.

The euro pulled back from a one-month high against the dollar to trade 0.5 percent lower at $1.0975. The common currency scaled a one-month peak of $1.1044 on Wednesday, extending last week’s short-covering rally after the ECB fell short of delivering the aggressive easing many had anticipated.

Meanwhile, the Australian dollar reached a high of $0.7333, pulling away from the previous day’s two-week low of $0.7169. It last stood at $0.7295, up 0.9 percent, helped by a robust jobs report. Another notable mover was the New Zealand currency, which rallied after the Reserve Bank of New Zealand cut interest rates but said further easing should not be needed.

The kiwi dollar climbed to a high of $0.6782, more than two full US cents above the previous day’s low of $0.6562. It was last up 0.3 percent at $0.6737.

“The kiwi must not appreciate any further as the RBNZ will otherwise take action again,” said Antje Praefcke, currency strategist at Commerzbank. “I would not oppose the RBNZ there and in my view levels above $0.68 are clearly selling levels.”

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