NEW YORK – Overshadowed by other stories in the news cycle this week was chaos in the global currency markets as a result of the Swiss National Bank’s decision to remove the currency ceiling on the price of the Swiss franc.
While resulting in a 30 percent surge in the value of the Swiss franc against the euro, the move has caused massive losses in currency trading markets worldwide, with disastrous consequences for institutional and retail currency traders shorting the Swiss Franc on bets the Swiss franc was overvalued and scheduled for a price reduction.
The magnitude of the crisis for U.S. currency traders became clear Friday when New York-based FXCM, a publicly traded U.S. currency broker, and the largest so far to announce it was in financial trouble after suffering a 90-percent drop in the firm’s stock price, reported the firm would need a $200-$300 million bailout to prevent capital requirements from being breached. Highly leveraged currency traders, including retail customers, were unable to come up with sufficient capital to cover the losses suffered in their currency trading accounts when the Swiss franc surged.
Currency traders worldwide allowed to leverage their accounts 100:1, meaning the customer can bet $100 in the currency exchange markets for every $1.00 the customer has on deposit in its account, can result in huge gains from unexpected currency price fluctuations or massive and devastating losses, should the customer bet wrong.
Foreign exchange brokers in London, Europe and New Zealand joined their New York counterparts in issuing a steady stream of warnings that numerous currency exchange firms are struggling to remain solvent.
The losses also impact major financial institutions in the currency exchange markets with Citigroup announcing a $150-million loss as a result of the Swiss franc’s appreciation, losses comparable to those suffered by Deutsche Bank, with Barclays reporting a somewhat smaller loss of close to $50 million.
In the fashion of closing the barn door after the horse has escaped, the U.S. Commodity and Futures Trading Commission announced Friday that the regulator would be carrying out a review of FXCM currency trading losses, as regulators worldwide began contemplating reining in this highly leveraged market.
The Swiss National Bank decision also means more rough going for the currently devaluating euro given that the Swiss National Bank will no longer be a buyer of euros while keeping the price of the Swiss franc artificially low.
Currency experts speculated the Swiss National Bank made the decision to remove the currency cap because of expectations the European Central Bank, at its policy meeting scheduled for Thursday, will make the decision to begin a policy of quantitative easing, known in financial markets as QE, effectively authorizing the European Central Bank to print billions of euros as it agrees to buy government debt of the economically struggling euro-zone member countries.
On Friday, the euro extended losses against the U.S. dollar, hitting a new 11-year low of $1.156 euro to the U.S. dollar.
In October 2014, the Federal Reserve under Chairman Janet Yellen’s direction ended the policy of quantitative easing under which it had purchased $85 billion in Treasury bonds every month in 2013, the break of what turned out to be 37 consecutive months in a row during which the Fed bought Treasury debt in an effort to stimulate the economy by keeping interest rates at or near zero.
Under the QE bond-buying spree, the Federal Reserve balance sheet ballooned to a record $4.48 trillion accumulated since announcing the first round of QE purchases in November 2008, as outgoing President George W. Bush tried to deal with a systemic financial markets collapse that helped propel Barack Obama into the White House as the housing market bubble fueled by speculative mortgages issued below investment grade s collapsed.
Yellen assumed the Fed chair on Jan. 6, 2014, determined to “taper” QE borrowing down to zero by the end of 2014, a goal Yellen achieved last October.
WND has repeatedly reported warnings that a massive downward stock market collapse in the U.S. could trigger a massive international stock market downward adjustment when interest rates begin to rise in the wake of the Fed’s discontinuing quantitative easing policies.
On Friday, the Dow Jones Industrial Average, DJIA, surged up 190.86 points, closing at 17,511.57, as the dollar generally increased in value in response to the Swiss National Bank currency move.
Still, gains in the DJIA remain fragile as the U.S. stock market remains highly volatile, suffering over last month a 1.65 percent loss, dropping 293.23 points.