Euro zone's troubles, gold vote test Swiss central bank

Sun Nov 16, 2014 6:06am EST
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By Alice Baghdjian and Silke Koltrowitz

ZURICH (Reuters) - The Swiss National Bank faces the biggest test of its cap on the franc in two years but may find it easier to defend now than when euro zone breakup fears were rampant and the strategy unproven.

The franc rose to its strongest level since September 2012 on Friday, brushing up against the 1.20 euro limit the Swiss National Bank introduced in 2011 when the currency's strength was squeezing exporters and threatening deflation.

Renewed weakness in the euro zone, and the European Central Bank's readiness to use radical measures to kick-start the economy, have fired up demand for the franc.

A referendum this month on Swiss gold reserves is also playing a role. While approval seems unlikely, a Yes vote would force the SNB to buy gold alongside any currency interventions.

Still, capital flows into Switzerland have declined sharply from the height of the euro crisis, as have fears that the interventions would spark inflation.

More importantly, the SNB's success in defending the cap back in 2011 and 2012 means it may not have to intervene on the same scale to fend off any new market challenges.

"The difference between now and 2011 is that the wider markets and most economists believe these interventions can break the neck of speculation," said Rudolf Strahm, an economist and former Swiss lawmaker.

"Some market players tried once to attack the franc but all they got was a bloodied nose and lost vast sums of money. Since then no one has dared to try again."   Continued...

A Swiss National Bank (SNB) logo is pictured on the SNB building in Bern July 29, 2011. REUTERS/Pascal Lauener