The euro was hovering close to its lowest level against the Swiss franc in 20 months on Monday, after the Swiss National Bank pledged to maintain its cap on the franc by buying unlimited amounts of foreign currency if necessary.
EUR/CHF was trading at 1.2063, not far from last Thursday’s trough of 1.2048, the lowest level since early December 2012.
In a newspaper interview published on Sunday, SNB President Thomas Jordan pledged to enforce the minimum 1.20 per euro exchange rate floor imposed by the bank three years ago, warning that an appreciation of the franc would heighten the risk of negative price growth.
Jordan said the franc is “still highly valued” and added that maintaining the 1.20 per euro exchange rate cap is “absolutely central to ensure adequate monetary conditions in Switzerland”.
The SNB imposed the cap on the euro exchange rate in September 2011 in order to ward off the risk of deflation and a recession as a result of the franc’s rapid appreciation.
Expectations for quantitative easing by the European Central Bank have been mounting in recent weeks, while rising geopolitical tensions, such as the conflict in Ukraine, have bolstered safe haven inflows to the franc.
The annual rate of inflation in the euro zone slowed to a five year low of 0.3% last month, adding to pressure on the ECB to take additional measures to shore up long-term inflation expectations.
The ECB targets an inflation rate of close to but just under 2%.
Data on Monday confirmed that Germany’s economy contracted by 0.2% in the second quarter, in line with forecasts and unchanged from a preliminary estimate.
Separate reports showed that Germany’s manufacturing sector expanded at the slowest pace in 11 months in July, while factory activity in France contracted at the quickest pace in 13 months, adding to the view that the recovery in the region is losing momentum.
Elsewhere, the euro was close to one year lows against the dollar. EUR/USD hit 1.3119, the weakest level since September 6 2013 and was last at 1.3138.