Franc slumps; stocks drop

The Swiss franc dropped sharply on Tuesday after the country's central bank pegged it against the euro, while a recovery in European stock markets proved short-lived as Wall Street opened sharply lower.

The most dramatic market movements centered on Switzerland after the bank announced it was pegging the national currency at 1.20 francs per euro in an attempt to rein in the export-sapping appreciation of the currency.

The Swiss National Bank said it was ready to buy foreign currency in unlimited quantities to keep the franc weak.

The surprise announcement had an immediate impact, particularly in the currency markets — by late afternoon London time, the euro was 8.9 per cent higher at 1.2021 francs, while the dollar was 9.3 per cent firmer at 0.8556 franc.

The peg also helped Swiss stocks make sizable gains despite losses in most other countries.

Switzerland's main SMI index was up 4 per cent at 5,349 as investors hoped the move would help Swiss businesses sell more in international markets. A weaker currency makes a country's goods and services more competitive all things being equal.

The franc has been hugely in demand in recent weeks due to its widely perceived status as a safe haven during times of market volatility. Gold, another safe haven, has also been hitting regular all-time highs.

Analysts were skeptical over whether the move will work in the long-run, especially if the European debt crisis piles pressure on the euro.

Despite ongoing worries over the debts of many countries in the eurozone, including Greece and Italy, the euro has held its own this year, trading at historically high levels against the dollar. By late afternoon London time, it was only 0.4 per cent lower at $1.4001.

"The SNB has in effect put itself in direct conflict with the markets' strong desire to buy safe haven assets," said Jane Foley, an analyst at Rabobank International. "In the very probable event that the eurozone crisis worsens in the coming months, intervention could be very costly for the SNB."

In stock markets, the recent negative tone reasserted itself despite early gains in Europe as U.S. traders returning from the Labor Day weekend remained pessimistic over the state of the U.S. economy following last week's figures showing no net job creation in August.

A stronger than expected non-manufacturing survey from the Institute for Supply Management did little to dispel the underlying concerns over the world's largest economy. Its main index rose to 53.3 in August from 52.7 the previous, in contrast to expectations for a decline to 51. Anything above 50 indicates expansion.

In Europe, Germany's DAX closed down 1 per cent at 5,193.97, while in France the CAC-40 fell 1.1 per cent to 2,965.64. Britain's FTSE 100 index was bucking the trend in afternoon trading, up 1.1 per cent at 5,156.84, thanks to gains by mining companies.

On Wall Street, the Dow Jones industrial average was down 2.1 per cent to 11,005.87, while the broader Standard & Poor's 500 index fell 2.1 per cent to 1,149.28.

For weeks, investors have fretted over a combination of fears over the state of the global economy and Europe's debt crisis.

Analysts said these concerns are likely to dominate markets for some time to come. Potentially the most important scheduled event this week will be the European Central Bank's monthly interest rate decision and the subsequent press conference from its president Jean-Claude Trichet.

"For investors, there are a whole load or reasons to be fearful, with little signs of any solutions forthcoming," said Louise Cooper, markets analyst at BGC Partners.

Earlier in Asia, shares were under pressure following Monday's big falls in Europe.

Japan's Nikkei 225 index dropped 2.2 per cent to close at 8,590.57 with shares of the country's powerhouse export sector skidding amid fears of another U.S. recession.

Mainland Chinese shares lost further ground with the Shanghai's benchmark Composite Index slipping to nearly a 14-month low, down 0.3 per cent at 2,470.52. The Shenzhen Composite Index lost 1.1 per cent to 1,085.35.

Bucking the trend, Hong Kong's Hang Seng registered a modest gain of 0.5 per cent to 19,710.50.

In the oil markets, prices remained under pressure by concerns over global demand. Benchmark oil for October delivery was down $2.05 to $84.40 a barrel in electronic trading on the New York Mercantile Exchange.

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