Foreign Exchange Report : GBP USD Rate Drops as Swiss National Bank Sets Lower Limit For EUR CHF Rate

7 Sep 2011 at 7 AM - Written by John Cameron

STORY LINK Foreign Exchange Report : GBP USD Rate Drops as Swiss National Bank Sets Lower Limit For EUR CHF Rate

The Pound Euro exchange rate (GBP EUR) is 1.1366. The Pound Dollar exchange rate (GBP USD) is 1.5980. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5075.

In a major development, Switzerland’s central bank, the Swiss National Bank, yesterday announced that it would be intervening in the currency markets with immediate effect to ensure that the EUR CHF exchange rate remains above the 1.2000 level on an ongoing basis. The SNB stated that they would enforce this lower limit by using Franc-denominated reserves to buy up ‘unlimited quantities’ of foreign currencies on the wholesale markets.

The move by the SNB, designed to assist Swiss exporters who have been punished by the strengthening of the Franc over recent months, represents the most significant direct intervention into the markets by a sovereign state for many years.

The SNB’s action saw the EUR CHF exchange rate immediately shoot from a touch above 1.1000 to trade close to 1.2200 - an appreciation of almost 11% in a matter of minutes. The EUR CHF rate has since settled back to trade between 1.2000 and 1.2050, but has not touched the 1.2000 level since Switzerland’s central bank made the announcement.

The major beneficiary of the weakening of the Franc has been the US Dollar. This suggests that the SNB may be favouring Dollar-denominated assets purchases. However, most of the support for the US Dollar is likely to have derived from institutional investors who no longer view the Franc as a safe haven and are seeking out the next best port in the current stormy economic conditions.

The move into the Greenback saw the GBP USD and EUR USD rates break down through the significant levels of 1.6000 and 1.4000 respectively, during yesterday‘s session.

It is likely that the Dollar was further supported by a dip in global risk appetite on the day, with European and US stocks coming under concerted selling pressures as investors continued to scale back their appetite for risk on fears over Eurozone sovereign debt contagion and the state of the global economy.

Elsewhere, last night saw the release of Australian GDP growth figures for quarter two. The numbers far exceeded investors’ expectations, showing that Australia’s economy expanded by an annualised 1.4% in the three months to June; analysts had anticipated growth of only 0.7% during this period. Australia’s economy had grown by an annualised 1% in the first quarter of 2011.

Asian equities markets were encouraged by the Australian data - Tokyo’s Nikkei 225 index is trading up by over 2% currently and Hong Kong’s Hang Seng has registered similar gains. If European and North American share markets follow Asia’s lead, then the US Dollar will come under renewed selling pressure later today, seeing the GBP USD rate retrace back above 1.6000.


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