August 5, 2010 / 8:40 AM / 8 years ago

UPDATE 1-Swiss FX reserves dip in July as interventions end

* Dip in FX reserves could be due to valuation changes

* SNB dropped FX intervention pledge in June

* SNB seen draining excess liquidity from interventions

(Adds quotes, details on cash draining ops, bills auctions)

By Catherine Bosley

ZURICH, Aug 5 (Reuters) - The Swiss National Bank’s foreign currency reserves fell in July, indicating the central bank did not step into foreign exchange markets after dropping its pledge on intervention at its June policy review.

Reserves fell to 219.3 billion Swiss francs ($210.5 billion) in July from a revised 224.9 billion francs in June, the central bank’s website showed on Thursday.[ID:nWEA3128] [ID:nWEA8613]

“The key point is that the activities on the currency market didn’t continue,” Credit Suisse economist Fabian Heller said.

Swiss currency reserves increased nearly fivefold after the SNB launched its policy of intervening to counter gains for the franc in March 2009 as part of a set of drastic measures to fight recession.

The lower reserves in franc terms do not necessarily reflect a reduction in foreign currency holdings as the dip could also be due to changes in valuation.

The franc for example rose against the dollar in July, lowering the value of the SNB’s dollar holdings, which stood at $45 billion at the end of June.

The franc hit a record high at 1.3070 per euro on July 1 but has weakened since, trading at around 1.3820 on Thursday EURCHF=.

The SNB only publishes details on its holdings on a quarterly basis.

DRAINING

The SNB has drawn criticism from the Swiss public for its large exposure to the euro, which lead to a hefty loss in the first half of this year. Currency traders say the bank has begun to diversify its holdings by buying dollars as well as Canadian and Australian dollars.

The SNB is also withdrawing some of the excess liquidity created by the interventions through issues of its own debt and reverse repos. On Thursday, it conducted its second cash-draining reverse repo at a rate of 0.11 percent, having a day earlier increased the rate somewhat to boost demand.

The SNB will also auction 1-month and 1-year bills.

“The SNB leaves some excess liquidity in the system to prevent the franc from strengthening while at the same time managing to steer the rates towards their 3-month Swiss franc Libor target,” UBS economist Reto Huenerwadel said.

The 3-month franc LIBOR — a rate set by markets — fixed at 0.17333 percent on Wednesday, still well above the SNB’s current target of 0.25 percent.CHF3MFSR=

Huenerwadel forecasts the SNB will raise its target rate from the current level of 0.25 percent at its next policy review in September.

“Does the SNB need to drain all the excess liquidity before lifting their 3-month Swiss franc Libor target? Not necessarily so,” Huenerwadel said.

Most analysts expect the central bank to hold off this year with its first post-crisis interest rate hike and markets price in a first move in March 2011.<0#FES:>

additional reporting by Sven Egenter; editing by Patrick Graham

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