August 10, 2011 – ZURICH (Reuters) - The Swiss National Bank said on Wednesday it would significantly boost Swiss franc supply in coming days and conduct swap transactions to counter a new jump in the safe-haven currency, but it stopped short of direct intervention.
The franc, which soared amid a market rout on Tuesday, fell slightly after the SNB announcement, trading at 1.0409 per euro and 0.7248 per dollar at 3:15 a.m. EDT.
Market players said anything other than direct intervention by the central bank or a complete turnaround in market sentiment was unlikely to stem off further gains in the currency.
"The SNB is continuing what it began last week by taking measures to increase Swiss franc liquidity," said Fabian Heller at Credit Suisse.
"It is not certain what impact these measures will have. It is not very likely this will lead to a big drop in the Swiss franc."
The SNB said it would keep a close watch on developments on the currency market and take further measures if necessary, but did not announce any intervention in the foreign exchange markets.
"The massive overvaluation of the Swiss franc poses a threat to the development of the economy in Switzerland and has further increased the downside risks to price stability," the SNB said in a statement.
The franc jumped more than 5 percent to close to parity with the euro late on Tuesday, hitting a new record high of 1.0075 francs.
"With this exchange rate it's almost impossible for Swiss exporting companies to remain competitive, so some action was needed," said Sarasin analyst Ursina Kubli.
The SNB announced a shock cut in interest rates to "as close as possible to zero" a week ago and said it would very significantly increase the supply of francs to the money market over the next few days.
But the impact on the franc was short-lived and it soon resumed its climb as global stock markets tumbled following Friday's S&P downgrade on U.S. debt.
With low-debt Switzerland seen as a safe haven from an escalating euro zone debt crisis and slowing global economy, the franc has surged in recent months.
Swiss exporters have called on both the SNB and the government to take action although the central bank has also been criticized for the heavy losses it incurred in its post-crisis interventions in 2009 and 2010.
"The SNB is clearly hesitant to act on the demand side after the unsuccessful intervention that ended in 2010, but on the other hand they may opt for negative interest rates as a further measure," Sarasin's Kubli said.
SNB Chairman Philipp Hildebrand, who has faced calls to resign over those losses, said last week the strong franc was exerting an extreme disinflationary effect and risked significantly slowing economic growth in the second half of the year.
(Reporting by Emma Thomasson and Martin de Sa'Pinto; Editing by John Stonestreet)