What happened to the Swiss franc?

NEW YORK (AP) – One of the world’s safest investments – the Swiss franc - has swung wildly last week after the central bank in Switzerland announced it would scrap its policy of limiting the rise of the currency.

It may seem like an arcane move, but it’s not. The Swiss National Bank’s surprise decision on Thursday caused the franc to surge against the euro and dollar, sending shockwaves through the global financial system.

Holders of Swiss francs profited handsomely, but many investors and brokerage firms, were pounded with losses. Two brokerage firms in London and New Zealand have announced huge losses and will have to close.

A New York-based currency broker said clients suffered significant losses, and it needed an emergency loan to stay in business.

The turmoil is all the more unsettling because, like US bonds, the dollar and gold, the Swiss franc has been viewed as a haven for investors, thanks to the stability and wealth of the Swiss government.

Here’s what happened to the franc and why it matters:

How did we get here?

Since 2011, the Swiss National Bank has had a program to keep its franc from appreciating too much against other currencies — most importantly the euro.

The franc’s rapid rise makes goods and products produced in Switzerland more expensive and less competitive in other countries. The bank set a limit of 1.20 francs to the euro to keep its rise in check.

So what happened next?

After several years, it became untenable for the SNB to keep up its program. The euro is continuing to weaken against other currencies, notably the dollar, and the European Central Bank is likely to start stimulus programs that would weaken the European currency even further.

The SNB decided to allow the market to re-price the franc Thursday. This caused a massive re-pricing of the currency that led to the franc to gain more than 20 percent against the euro.

Reserve currencies do not move like this, so a 20 percent move in the franc was considered historic, investors said.

How did the Swiss bank’s move hurt banks and traders?

Because currencies don’t usually move much in a single day, traders often use significant leverage to boost their returns. Leverage of 50:1 is not unheard of in the currency market.