Euro falls after Switzerland abandons currency cap

The euro lost nearly 20 percent of its value against the Swiss franc on Thursday after the central bank abandoned the cap on the franc's value against the single currency.

In a statement on Thursday (15 January) the Swiss National Bank (SNB) said that the minimum exchange rate of CHF 1.20 per euro, introduced in September 2011, was no longer justified and that “divergences between the monetary policies of the major currency areas have increased significantly”.

The value of the Swiss franc increased by around 30 percent in the hours following the announcement, falling from 1.2 to 0.8 before reaching 1.04 at the close of trading.

The euro also fell to new lows against the dollar and sterling.

“The euro has depreciated substantially against the US dollar and this, in turn, has caused the Swiss franc to weaken against the US dollar,” said Thomas Jordan, the chairman of the Swiss National Bank.

“In these circumstances, the SNB has concluded that enforcing and maintaining the minimum exchange rate for the Swiss franc against the euro is no longer justified,” he added.

At the same time the SNB also reduced a key interest rate from -0.25% to -0.75%, increasing the amount investors have to pay to hold deposits in Swiss banks.

The move is also a reflection of the eurozone’s weakness and a further indication that markets expect the European Central Bank to launch its own money-printing programme - known as quantitative easing - when its governing council meets next Thursday.

However, a stronger franc will hurt Swiss exports, leading the country’s stock market to fall by 9 percent - its biggest fall since 1989.

It is also bad news for the country's tourist industry at a peak time for the Alpine skiing season.

Nick Hayek, chief executive of watchmaker Swatch, described the decision as a “tsunami" for Switzerland's economy.