BERNE (MNI) – The Swiss National Bank has registered “significant”
losses on its foreign exchange portfolio and there is the “potential for
further losses,” SNB board member Jean-Pierre Danthine said Thursday.

However, the SNB’s hands are tied by its monetary policy, limiting
what it can do with its foreign exchange reserves, Danthine said in the
text of a speech released by the SNB following its rate decision
announcement Thursday morning.

“Just as the increase in our foreign exchange reserves was
determined by the demands of monetary policy under the exceptional
circumstances that prevailed in 2009 and 2010, monetary policy
considerations will continue to dictate our actions in the future,”
Danthine said. “This means, in particular, that selling our foreign
exchange reserves (and buying Swiss francs) is not an option at the
moment.”

Buying francs would represent a de facto tightening, which is not,
for now, in line with the SNB’s monetary policy stance. The SNB said
Thursday it had decided to keep its “expansionary monetary policy” in
place, leaving the 3-month Libor target unchanged at 0.0%-0.75%.

SNB Chairman Philipp Hildebrand, who also spoke following the rate
decision, said, “the SNB is concerned about exchange rate developments.”
He noted that the swiss franc’s real export-weighted exchange rate had
risen in the second quarter to an all-time high.

Danthine said that monetary policy considerations also militated
against hedging of the SNB’s foreign exchange holdings, because this
would be “equivalent to buying Swiss francs against foreign exchange for
forward delivery. The effect of hedging on the market is thus comparable
to the direct sale of foreign currency.”

The only option, he said is for the central bank to “diversify its
risks as efficiently as possible with a view to limiting the exchange
rate, credit and concentration risks of its foreign currency
investments.”

But the possibility for diversification is limited by the
availability of instruments in financial markets, Danthine said, noting
that 55% of the bank’s foreign currency investments were denominated in
euros and 25% in U.S. dollars. The remainder is in yen (10%), Canadian
dollars (4%), UK pounds sterling (3%), and other currencies (3%), he
revealed.

Danthine noted that the SNB’s foreign exchange reserves are made up
not only of foreign currencies but also gold.

“In a risk-averse environment, losses tend to occur on foreign
currency investments and profits on gold, while in a risk-friendly
environment the opposite is true,” he observed. “Consequently,
diversification of a portfolio to include gold and foreign currency
helps to stabilise earnings over an entire risk cycle.”

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

[TOPICS: M$$FX$,M$X$$$,M$$CR$,MN$RP$,M$$EC$]