August 10, 2011 / 7:50 AM / 6 years ago

UPDATE 4-SNB won't exclude anything to cap soaring franc

 * SNB signals fx swap moves; further steps if needed
 * Says Swiss franc 'massively overvalued'
 * Franc jumped 5 pct on Tuesday to close to euro parity
 * Analysts sees more franc gains even if SNB intervenes
 * Moot possible capital controls, negative interest rates

 (Adds Jordan, Danthine interviews)	
 By Emma Thomasson	
 ZURICH, Aug 10 (Reuters) - The Swiss National Bank is
looking at all options as it faces rising pressure to take
drastic action to bring down a soaring franc, after its steps so
far have largely failed to dampen demand from safe-haven
 To counter what it called a "massive overvaluation", the
Swiss National Bank (SNB) said on Wednesday it would flood the
market with even more francs, including by conducting foreign
exchange swap transactions, in a bid to make holding the
currency less attractive.	
 It threatened further measures if necessary, stopping short
of direct intervention for now after it ran up record losses in
currency market forays last year, prompting calls for SNB
Chairman Philipp Hildebrand to resign.	
 But market players said even renewed intervention would
probably only cap gains in the short term. Extraordinary
measures such as some kind of capital controls or negative
interest rates would be needed to reverse the franc's rally,
which is making Swiss exports less competitive.	
 When asked about these, SNB Board Member Jean-Pierre
Danthine told the newspaper Le Temps: "Nothing is excluded."	
 "Among the measures mentioned in the press in recent days,
one must admit that some are more practicable than others," he
said, explaining that some lacked a legal basis, while others
would be easy to circumvent or would lead to negative
second-round effects. 	
 Just a week ago the SNB announced a shock cut in interest
rates to close to zero, but that prompted only a brief pause in
the franc's climb, which has accelerated as global stock markets
tumbled in recent days. 	
 On Tuesday, the franc soared more than 5 percent against
both the dollar and euro in its biggest one-day percentage move
ever against both currencies amid a market rout. 	
 It dipped on Wednesday after the SNB announcement, but soon
resumed its climb against the euro , trading up 0.6
percent at 1.0335 at 1749 GMT. Against the dollar it
traded up nearly a percent at 0.7293.	
 "With liquidity already ample in Switzerland, the Swiss
authorities could be doing little more than pushing on a
string," said Rabobank currency strategist Jane Foley. "The
outlook for the euro-Swiss franc lies largely in the hands of
the euro zone politicians rather than the Swiss authorities."	
 In a sign of how strong demand for Swiss francs is, Swiss
interest rate futures crossed the 100.0 mark for the first time
ever, Reuters data indicated. <0#FES:> 	
 "We are not aware of any previous case in any major
industrial country where three-month interbank rates or rate
futures have priced in negative rates," Michael Saunders at Citi
 Investors have flocked into safe-haven assets like the
franc, yen and gold since the start of the
financial crisis.	
 The franc's popularity has gained further during an 18-month
euro zone debt crisis and rocketed this week after Standard &
Poor's downgrade of the U.S. credit rating from triple-A hit the
already waning appeal of the dollar.	
 Since markets went into a tailspin in July over political
wrangling to avert a U.S. government default and fears Italy
could be the next euro zone economy in trouble, the franc has
jumped 17 percent against the euro and 16 percent against the
 The soaring currency has had little impact on the Swiss
economy so far, with growth only forecast to slow slightly to 2
percent this year and unemployment steady at just 3 percent.	
 Exports of goods from watches to drugs to financial services
have held up well, supported by sales to booming emerging
markets and robust demand in neighbouring Germany.	
 But even globally diversified companies like drug firm Roche
 and watch maker Swatch have started to report
an impact on earnings in recent months.	
 "We've been confronted with a seemingly endless increase in
the Swiss franc," said Jim Singh, chief financial officer of
food giant Nestle which said on Wednesday first-half
sales took a 13.8 percent hit from the franc. 	
 The currency jumped close to parity with the euro late on
Tuesday, hitting a new record high of 1.0075 francs per euro as
well as a new peak against the dollar of 0.7068, according to
dealing platform EBS.	
 BACK TO THE 1970s?	
 Swiss business groups and trade unions have warned the
recent dramatic appreciation could push the country back into
recession, threatening tens of thousands of jobs if companies
are forced to move production abroad.	
 In addition to renewed central bank interventions, other
options that have been proposed include pegging the franc to the
euro -- seen as highly unlikely in this fiercely independent
country -- as well as capital controls.	
 "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," said Sarasin analyst Ursina Kubli.	
 However, the SNB may be wary of taking this path, given that
negative interest rates on assets held by foreigners had little
impact when Switzerland tried them in the 1970s when the franc
was surging as a result of the oil crisis.	
 "A broader negative interest rate could work," Nomura
analysts wrote in a note. "One significant risk associated with
this option is the impact on the Swiss banking sector."	
 The Swiss government last month rejected imposing capital
controls or exporter tax breaks to help the economy, but said on
Monday it was looking at new unspecified measures after an
emergency meeting on the franc. 	
 (Additional reporting by Martin de Sa'Pinto, Caroline Copley,
Katie Reid, Catherine Bosley, and Silke Koltrowitz; Editing by
Catherine Evans/John Stonestreet/Susan Fenton)	

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