Swiss National Bank Scraps Euro Cap

The Swiss National Bank unexpectedly scrapped its cap on the franc on Thursday, sending the safe-haven currency crashing through the 1.20 per euro limit it set more than three years ago.

Minutes after the announcement the franc had soared by almost 30 percent in value against the euro. SNB vice-chairman Jean-Pierre Danthine had said as recently as Monday that the cap would remain the cornerstone of its monetary policy.

"This is a very risky move. You can see that in the market reaction that is extreme," Sarasin economist Alessandro Bee said.

In its second surprise announcement in as many months, the SNB said it would discontinue the cap it introduced on Sept. 6, 2011 to fight recession and deflation threats after investors fleeing the euro zone crisis pushed the franc to record highs.

"This exceptional and temporary measure protected the Swiss economy from serious harm. While the Swiss franc is still high, the overvaluation has decreased as a whole since the introduction of the minimum exchange rate," the SNB said in a one-page statement.

Last month, it was forced to take further measures to defend the cap as investors concerned about the euro zone and Russia's deepening crisis bought the currency, saying it would charge banks for deposits in francs for the first time since the 1970s.

On Thursday, SNB said it would further lower the interest rate on these sight deposit account balances -- cash commercial banks and other financial institutions hold with the central bank -- by 0.5 percentage points, to −0.75 percent, above a certain threshold.

It said it would also expand its three-month Libor target range to -1.25 percent and -0.25 percent from the previous range of -0.75 percent to 0.25 percent.

"We believe that latest day's FX interventions should have cost plenty to the SNB and pushed the SNB toward today’s surprise decision," said Swissquote analyst Ipek Ozkardeskaya.

"Given the pressures on the EUR/CHF, an accidental break of the floor would have been more serious for SNB credibility. The panic situation in the franc is expected to continue until (a) new game plan (is announced)."

In a chaotic few minutes on markets after the SNB's announcement, the franc broke past parity against the euro to trade at 0.8052 francs per euro before trimming those gains to stand at 1.04 to the euro at around 1050 GMT.

"The explanation that the overvaluation has decreased has been wiped out within seconds," said Sarasin's Bee. "Let's hope that this is an extreme move that will normalize soon. It is certainly dangerous for the Swiss economy."

The SMI index of Swiss shares fell by 6.1 percent, its biggest one-day fall since October 2008.

(This story corrects trading level of franc in paragraph 11)

(Reporting by Caroline Copley and Silke Koltrowitz; Editing by Catherine Evans and Kevin Liffey)