Swiss currency move roils markets
Switzerland's central bank lifted the cap on the Swiss franc vs. the euro, an unexpected move that sent Swiss stocks plunging and gold soaring.
The problem: The Swiss currency had become so strong against other currencies, particularly the euro, that the Swiss put a limit on the exchange rate between euros and francs nearly three years ago.
Switzerland had capped the value of the franc at 1.20 francs to the euro and spent billions in the foreign currency market defending that level.
To the Swiss, a rising currency means that its exports are more expensive abroad, and that imports are cheaper. Both factors could hurt the Swiss economy.
It also means that prices in Switzerland were exorbitant for tourists. In July, for example, The Economist calculated that a McDonald's Big Mac cost $6.83, vs. $4.80 in the U.S.
The immediate effect of the central bank's move was a huge rise in the value of the Swiss franc vs the euro — nearly 30%. In addition to removing that cap, the central bank pushed Swiss short-term interest rates below zero. Doing so, in theory, would make investments in Swiss francs less attractive to foreign buyers, and therefore keep a lid on demand for Swissies.
The move by the normally staid Swiss central bank stunned currency and stock markets. The euro fell to $1.16 per dollar, and the price of gold, widely seen as a substitute currency in times of crisis, rose to $1,264.80 a gain of $30.30 an ounce.
The Swiss stock market tumbled on the news: It closed down 8.7%, the equivalent of a 1,507-point drop in the Dow Jones industrial average.
Swiss central bank noted that the rising dollar had taken some pressure off the Swiss franc vs. the dollar. Investors have been bidding up the dollar in anticipation of rate hikes by the Federal Reserve later in the year.
The drop in the Swiss market, along with more disappointing earnings from big U.S. banks, helped extend Wall Street's losing streak to five. The Dow fell 106 points to 17,321 and the Standard & Poor's 500 index closed below 2000 for the first time since Dec. 16.
For investors in international stock funds, which have seen enormous inflows the past three years, the drop in the Swiss franc and the euro was more bad news. A rising dollar means that overseas stocks are worth less in dollars. The past 12 months, stocks in the eurozone have eked out a 0.4% gain, according to MSCI, which tracks overseas stocks. In dollar terms, they have fallen 13.5%.