Switzerland’s central bank triggered turmoil in the markets Thursday when it unexpectedly scrapped its cap on the Swiss franc’s exchange rate against the euro, a move that unleashed new volatility among bonds and currencies around the world and further underscored growing concerns about global economic prospects.
Against the cloudy backdrop of collapsing oil prices, a sharply rising dollar, fresh doubts about the stability of the euro and mounting global concerns over deflationary pressures, the move by the Swiss authorities was the starkest sign yet of the pressure policy makers face in dealing with unusual financial conditions that threaten the world’s already fragile economy.
The abandonment of the cap, which had essentially pinned the currency at 1.20 francs per euro for the past 3½ years, prompted a collapse of as much as 30% in the euro versus the franc—the biggest single-day move in a developed market traders could recall. Swiss stocks fell 8.7% as traders worried the stronger franc would hurt Switzerland’s exports, especially to Europe.
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