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How the Swiss Will Boost the Euro

Wednesday, 31 Oct 2012 | 2:43 PM ET
AP

The Swiss National Bank has trimmed its big euro position, taking downward pressure off the currency.

It's been over a year since the Swiss National Bank set a cap on the Swiss franc's value relative to the euro, and it has successfully defended that limit ever since, mainly by adding euros to its reserves. The process has come at a price for the: the SNB has been laboring to bring its reserve balances back to normal by reducing its euro holdings, placing significant downward pressure on the common currency.

The good news for the euro is that the SNB's rebalancing seems to be a fait accompli. As of the end of September, euros accounted for 49% of the bank's reserves, down from 60% at the end of the second quarter, according to an analysis by Barclays Capital.

"With the EUR allocation back at levels the SNB seems to have historically been comfortable with, the pace of EUR diversification is going to slow down, leading to reduced pressure on EUR crosses," says Raghav Subbarao, a currency strategist at BarCap.

Other currencies will feel the effect of the shift as well, according to Subbarao. He says the Swiss central bank has been buying a variety of "other currencies," notably the Australian dollar, Swedish krona, Danish krone, Singapore dollar, and South Korean won.

"Reduced diversification by the SNB is also likely to put less upward pressure on these currencies," Subbarao.

The euro got a nice lift earlier today after reports surfaced of the Swiss National Bank's new reserve allocation. Coincidence? You decide.

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