ZURICH – Switzerland's central bank on Thursday softened its longstanding warning about the strong franc but still said that it was "highly valued, " suggesting Swiss officials aren't fully satisfied yet with the franc's weakening against the euro.
The franc weakened against the euro despite the SNB's more upbeat view on the franc, suggesting the central bank was able to alter its language without signaling any imminent shift in its monetary policies that could have spooked investors.
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In a policy statement accompanying its decision to keep its key deposit rate at -0.75%, the SNB noted that the franc has weakened against the euro and strengthened against the U.S. dollar since its last meeting three months ago.
"Overall, this development is helping to reduce, to some extent, the significant overvaluation of the currency," the SNB said. "The Swiss franc nevertheless remains highly valued, and the situation on the foreign exchange market is still fragile," it said.
The "highly valued" assessment is a departure from the SNB's longstanding warning that the franc was "significantly overvalued." The language tweak was noteworthy because the SNB's concerns over the franc's strength have formed the bedrock of its monetary policies t hat include negative interest rates and large-scale currency interventions.
Currency investors shrugged off the change, suggesting that a stronger European economy and expectations for reduced stimulus from the European Central Bank will continue weakening the franc. The euro traded at 1.15 francs at 0950 GMT, up about 0.3% from Wednesday's close and near the highest level against the franc in two-and-a-half years.
The franc has weakened by about 6% since the SNB's last meeting in mid-June. And while it has strengthened some against the U.S. dollar, the euro exchange rate is much more important for Switzerland because the eurozone if by far its largest trading partner.
"Maintaining the unqualified significant overvaluation statement would not have been credible," said Oliver Adler, head of economics at Credit Suisse.
Still, the SNB said it is still willing to intervene in markets if needed.
Despite its recent weakening, the franc remains significantly stronger than it was before the euro debt crisis flared seven years ago when one euro bought about 1.4 francs. Between 2011 and early 2015, the SNB kept the euro-franc rate from falling below 1.20 and spent vast sums on currency intervention to keep that from happening. The franc tends to strengthen in times of global stress when investors seek safety.
The SNB's franc comments have evolved over the years with varying expressions of alarm. At the end of 2010, the SNB noted that the franc "has again appreciated," and that became "strong appreciation" by June 2011. The language turned more alarming that summer with officials referring to "massive overvaluation" of the franc. When the franc ceiling was in place from autumn 2011 until January 2015, the SNB called the franc's value "still high" and it adopted the "significantly overvalued" language after the cap was scrapped and the franc soared anew. On Thursday it went back to "highly valued."
"I think right now they are in the semi-comfort zone. They would be very happy to see the franc above 1.20 [against the euro] and would be very unhappy to see it below 1.10," said Mr. Adler.
Despite the strong franc, Switzerland has chugged along with modest, if unspectacular growth while maintaining a high trade surplus and low unemployment. After years of falling prices, inflation has been positive, but low, this year.
Todd Buell contributed to this article.
Write to Brian Blackstone at email@example.com
(END) Dow Jones Newswires
September 14, 2017 06:24 ET (10:24 GMT)
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