Currency News: Swiss Fallout Causes Euro To Tumble

The euro fell to an 11-year low against the dollar on Friday, a day after the Swiss National Bank (SNB) made a surprise decision to eliminate its exchange rate cap. This removed a source of support for the euro, adding further pressure to the currency that has been troubled with fears that the Eurozone economy is grappling with slowing growth.

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During the recession in 2011, investors throughout the Eurozone seeking a safe place to keep their cash poured money into Switzerland, which has a long reputation for having an incredible stable financial system. This caused the franc to explode in value, which is bad news for domestic exporters whose goods become less competitive abroad. Switzerland is known for its high-value exports, so a surging currency is not helpful.

In the summer of 2011, the SNB announced a cap on the exchange rate between the two currencies, not allowing the euro to weaken below 1.20 against the franc. The bank printed francs on a regular basis to buy euros in the market to keep the exchange-rate cap, which held for more than three years.

On Thursday, the bank removed the cap without any hint that it was coming, causing the franc to surge against other currencies and the euro to tumble. The SNB explained the move, saying that the crisis period of 2011 has passed, but that the euro is headed for further weakness. The bank felt that all the euros it was accumulating on its balance sheet was becoming a liability.

The euro is only likely to get worse as the European Central Bank appears to be on the verge of launching its own quantitative easing program, which would pressure the euro down further and increase the cost of propping up the currency for the SNB. Looking forward, the bank might try intervention with respect to the US dollar instead of the euro, with added emphasis on the franc’s trade weighted index.

The I Know First algorithm was able to correctly predict that the US dollar would lose value to the franc. On December 17th, 2014, the I Know First algorithm gave the USD/CHF currency pair a signal strength of -5.48 for the one-month time period, meaning that the franc would become more valuable compared to the dollar. Over that time period, the US dollar is down 11% against the franc in accordance with the algorithm’s prediction.

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The news that the SNB unexpectedly ended its exchange-rate cap comes at a time when financial markets are experiencing a high level of volatility, partially due to the fall in commodity prices. This added stress to the system has only added to the volatility, with ripples still being felt throughout the investing world.