UPDATE 1-SNB's Danthine: franc cap best choice for Swiss

Thu Jun 28, 2012 3:36am EDT

Related Topics

* Singapore, Denmark, Sweden FX strategies wouldn't work

* Says such extreme forex movements unique to Swiss franc

* SNB prepared to make "unlimited" currency interventions

* Would consider capital controls under worst-case scenario

* Cites negative interest rates as non-invasive option (Adds quotes, details)

By Emma Thomasson

ZURICH, June 28 (Reuters) - The cap the Swiss National Bank set on the franc is its best strategy for managing the economy, its vice chairman said on Thursday, while not ruling out further measures including possible capital controls in the event of a deeper crisis.

As things stood and given the franc's safe-haven appeal, the cap of 1.20 per euro that the SNB set on the soaring local currency last September was the right policy, Jean-Pierre Danthine told an event in Zurich.

Other approaches to managing foreign exchanges movements - notably Singapore's multi-currency crawling exchange rate peg, Denmark's long-standing crown peg to the euro and Sweden's free floating currency - would not work in Switzerland.

"The minimum exchange rate is an absolute necessity for the Swiss economy," he said. "Switzerland is a very special case. No small open economy has ever undergone such extreme exchange rate movements."

Singapore's crawling peg had forced its central bank to run up huge foreign exchange reserves and had not completely stopped currency volatility.

"The size of reserves shows Singapore is not the answer," he said. "There is no obvious consequence in terms of stabilisation."

Denmark's euro peg meant the country had given up control over monetary policy, leading to inflation and the inability to prevent a housing boom-and-bust.

Sweden operated a "text-book" monetary policy, Danthine said, but did not have to deal with the same kind of safe-haven flows as Switzerland.

"From a Swiss perspective this is not a choice variable. We have to live with the way our currency is taken as the market and do the best with it," he said.

Asked about possible capital controls to prevent deflation risks, Danthine said further measures were not needed now, but the SNB was prepared to act "in a worst-case scenario".

He cited Sweden's imposition of negative interest rates as a capital control that did not have a major negative impact. "It didn't create any problem and it also didn't impose any burden on the banking sector," he said.

Danthine reiterated that the SNB was prepared to buy foreign exchange in unlimited quantities after the bank saw a big jump in reserves in May as it intervened heavily to defend the cap.

Swiss exporters could cope with the current exchange rate if the world economy recovered, but in the event of a further downturn "we will see again that at 1.20 the Swiss franc is still very overvalued." (Reporting by Emma Thomasson; Editing by John Stonestreet)

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